Today, Ray Dalio, the founder of Bridgewater Associates, shared his new book "Debt Crisis: My Principles for Dealing with It" on Weibo.
On the afternoon of March 18, shortly after the opening, amidst the silence of major mainstream foreign media, information about "Bridgewater blowing up" spread like wildfire among institutional markets. Bridgewater had previously explained the performance of its products through a daily observation report.
Bridgewater's strategies are mainly divided into two categories. One is the Pure Alpha strategy, which seeks active returns while pursuing stability and neutrality. The other is the All Weather strategy, also known as the risk parity strategy, which aims to control risks in longer market cycles. With the double impact of the new coronavirus and the oil black swan, Bridgewater's Pure Alpha strategy experienced a significant drawdown. Generally speaking, in the financial market, many assets such as stocks, bonds, commodities, and precious metals have a negative correlation. For example, when the stock market declines, the bond market often rises. Therefore, through risk parity, one can pursue higher excess returns while combating risks. This is the reason why Bridgewater designed the All Weather strategy.
The so-called All Weather strategy requires equal risk allocation in the portfolio. For example, in a vacuum assumption, if stocks and bonds each account for half of the portfolio, but stocks are usually riskier than bonds, then if risk parity is pursued, the risk of bonds can be leveraged to the same level as stocks. However, in the current market environment, the All Weather strategy has encountered a bug in this methodology.
With the spread of the epidemic and the collapse of oil prices, US stocks, gold, commodities, and even temporary US bonds have experienced violent fluctuations. According to the logic of "sell when volatility is high," the All Weather strategy conducted a massive sell-off of US stocks, followed by assets such as oil, gold, and US bonds. The key issue is that, as mentioned earlier, when holding low-volatility assets, leverage is added to meet the risk parity requirement. When government bond prices are under pressure, the tension in the repo market will inevitably rise sharply.
In fact, if Bridgewater were the only fund in the market adopting this strategy, everything might have been fine. However, in recent years, more and more similar strategies have taken the same actions in one-sided market conditions where black swans are dancing, leading to inevitable trampling - the All Weather strategy is overloaded.
Fortunately, on the evening of March 18, Ray Dalio responded on his verified Weibo account: "There are rumors today that Bridgewater has 'blown up' and 'encountered trouble.' I assure you that this is completely false. Bridgewater is doing well."
