Update: After sparking much apocalyptic speculation following the previously reported WSJ article according to which Bridgewater has a $1.5 billion short position on the S&P which implies a sharp market drop before March 2020, the fund’s founder, Co-Chairman and Co-CIO has come out refuting the WSJ article.
In a LinkedIn post published shortly before noon, Dalio published a brief LinkedIn comment in which he claims that the WSJ article’s conclusion that Bridgewater is betting on a market drop is “wrong”, and wants to “make clear that we don’t have any such net bet that the stock market will fall.” He then pulls a page out of every Wall Street prop desk, and certainly that of the JPMorgan whale, in which he says that “we don’t have any such net bet that the stock market will fall. We explained to Juliet Chung, the author of the article, that to convey us having a bearish view of the stock market would be misleading, but it was done anyway.“
What Dalio is in effect saying is that the short position is merely a hedge to its existing portfolio, which of course, is the same “explanation” that Wall Street prop desks used over and over for the past few years when they were banned from taking pure directional trades, and as a result, were forced to justify any positions as “hedges” to other positions, with the London Whale’s IG9 fiasco coming to mind most notably.
Of course, it is impossible to glean just what is the underlying thesis behind any one trade, which also explains why Dalio was especially careful to state that he does not have a “net” bet that the market will fall. Well, perhaps it’s not net. Perhaps it’s just a standalone bearish position to offset the fund’s other bullish position which Bridgewater is too big to simply unwind without spooking the broader market.
In any case, Dalio concludes by attributing the reporting to yet another case of fake news, saying that “we are now living in a world in which sensationalistic headlines are what many writers want above all else, even if the facts don’t square with the headlines. You can believe me or you can believe The Wall Street Journal writer. I hope you have come to know that you can believe me.”
The answer, of course, will be revealed by Bridgewater’s performance in 2020 – if the fund generates an abnormally high return should the market indeed drop, we will have our answer. And vice versa.
Dalio’s full statement is below, via LinkedIn:
The Wall Street Journal wrote an article that said “Bridgewater Bets Big on Market Drop.” It’s wrong. I want to make clear that we don’t have any such net bet that the stock market will fall. We explained to Juliet Chung, the author of the article, that to convey us having a bearish view of the stock market would be misleading, but it was done anyway. I believe that we are now living in a world in which sensationalistic headlines are what many writers want above all else, even if the facts don’t square with the headlines. You can believe me or you can believe The Wall Street Journal writer. I hope you have come to know that you can believe me.
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At the beginning of 2018, Ray Dalio said during one of his annual speeches at Davos that investors would feel “pretty stupid” if they were holding cash. Over the following 11 months, one of the biggest market blowups since the crisis left US stocks in the red for the year. But somehow, Bridgewater emerged as one of the best-performing firms of 2018, with one of its funds up double digits.
Almost two years later, Dalio has made it clear that he’s increasingly worried about the state of the global economy, and he’s willing to risk losing 1% of his firm’s assets to make sure Bridgewater is protected.
A few months back, the world’s biggest hedge fund enlisted Goldman Sachs and Morgan Stanley to help structure a massive bet that will pay off if, between now and the end of the first quarter, global stocks retreat. According to WSJ, Bridgewater has amassed a giant $1 billion bet using put options.
If the S&P 500, Stoxx 50 or both decline before Bridgewater’s put options expire, the firm will make money from the bet. If stocks rise, then those options will likely expire worthless.
The firm paid $1.5 billion – or roughly 1% of its $150 billion net worth – for the options, which have a notional value of $100 billion.
WSJ broke the story, but its reporters couldn’t say for sure what Bridgewater’s motives are. The options could constitute a directional bet in their own right, or simply a hedge against Bridgewater’s sizable long exposure to equities.
According to WSJ, Bridgewater’s buying up of put options had become the subject of Wall Street gossip. But as far as we can tell, Bridgewater’s buying might have been spurred by the firm’s appreciation for a bargain. Because as far as we can tell, with stocks climbing to fresh highs, traders haven’t been as interested in hedging their positions, for whatever reason.
Some speculate that Dalio, who has espoused increasingly progressive political opinions in recent months, might have concocted a bet that will pay off if progressive Dems like Elizabeth Warren notch victories in the earliest primaries, though a Bridgewater spokesperson denied that the firm is making big bets on politics.
As WSJ points out, George Soros lost $1 billion when his firm bet on a big market drawdown in the wake of President Trump’s surprise electoral victory.
So far this year, Bridgewater’s performance has been mixed: the firm’s macro fund has lost 2.7% through October, while its All Weather fund is up 14.5% for the period. But with the S&P 500 having achieved is longest bull run in its 90-plus-year history, it’s hardly surprising that traders suspect it might have finally run out of steam, especially given the Democrats’ unsettling shift to the left.