Setting up a hedge fund aged 25 is impressive. That hedge fund surviving for thirty years is remarkable. And returning 15 per cent for 15 years?
This is one reason why people listen to Ray Dalio, founder of Bridgewater Associates. In an interview with FTfm on Monday he calls for a currency-backed solution to the economic woes of the US, notes the dissolution of traditional asset classes and reveals some of his trading strategies.
Here’s a few nuggets:
The main reason that Bridgewater has survived for over 30 years while most other hedge funds haven’t is that we don’t use a lot of leverage. Using leverage is like playing Russian roulette. It means that you are inevitably going to get a bullet in the head…
Investments were [once] in stocks and bonds, and managers specialized in one or the other. An investment manager was different from a real estate owner, who was different from a private business owner. Now most everything that earns money is securitised…
There is $517,000bn in derivatives exposures outstanding that I, and everyone else, don’t fully understand…A lot of it is being held by investors who are following financial strategies that have not been well stress-tested.
Poor stress-testing does not mean insufficient stress-testing, but rather poor modelling or faulty assumptions, Dalio says. The most common mistake of investors is believing “that things that worked in the past will continue to work.”
While most clamour for interest rate adjustments, he suggests currency management would be a better response to current US economic woes. “The world has been awash with liquidity,” he said. Cutting interest rates would only encourage more debt-backed spending. And that is a timely debate to begin.
