The Economist - USA (2020-08-01)

The EconomistAugust 1st 2020 Finance & economics 59

1

“W

e’ve mademore money for our cli-

ents than any other hedge fund in

existence,” declared Ray Dalio, the founder

of Bridgewater Associates, the world’s larg-

est hedge-fund manager, in 2017. In early

2020 Bridgewater was head and shoulders

above the rest, having made $58.5bn, net of

fees, for its clients since the firm’s incep-

tion in 1975. Mr Dalio is worth $17bn, mak-

ing him one of the richest people in the

world. He stepped back from running the

firm in 2017, but it has been shaped by his

deep economic analysis, and his unortho-

dox management style, which he calls “rad-

ical transparency”.

In recent months, though, Bridgewa-

ter’s performance has suffered, and ques-

tions have been raised about how transpar-

ent its management really is. Start with its

performance, which has struggled during

the pandemic. The firm has two main types

of funds: “pure alpha”, which makes active

bets based on its predictions for the econ-

omy, and “all weather”, where holdings of

stocks and bonds are based on their under-

lying volatility. The latter strategy lost

around 7% in the first quarter. The pure-al-

pha funds fared even worse. In mid-March

Mr Dalio said they were down between 7%

and 21% since the start of the year. Accord-

ing to reports, they subsequently recovered

a bit, with losses pared by June, but were

still significantly down on the year.

That is in contrast to the performance of

many other “macro” hedge funds. Accord-

ing to Preqin, a data provider, these made

small positive returns, of 1.4% on average,

in the first half of the year.

As a result of its losses, and investors

pulling their money out of its funds,

Bridgewater’s assets under management

have fallen—from $163bn at the end of Feb-

ruary to $138bn at the end of April.

The all-weather funds have low, fixed

management costs and no performance

fees. So it is the performance of pure alpha

that largely determines Bridgewater’s over-

all financial health. That might explain

why the firm is retrenching. Even as many

businesses have laid off workers during the

pandemic, few hedge funds are thought to

have done so. But on July 24th the Wall

Street Journal reported that Bridgewater

had shed several dozen employees across

its research, client-services and recruit-

ment teams, out of a reported headcount of

around 1,500 employees. Most of its in-

coming graduate investment analysts have

had their start dates pushed back a year.

Bridgewater has also become engaged

in a public spat with its former co-chief ex-

ecutive, Eileen Murray, who left in March.

She has since alleged that the firm discrim-

inated against her and claims it offered her

a smaller exit package than those offered to

male peers. In response, the firm is seeking

to withhold deferred compensation, worth

between $20m and $100m, from Ms Mur-

ray. It claims that, by speaking publicly

about her allegations, she may have violat-

ed the confidentiality terms of her con-

tract. On July 24th Ms Murray filed a law-

suit in Connecticut saying that she had

followed, and would continue to respect,

the rules on the disclosure of the firm’s

confidential information and trade se-

crets. In court documents she claimed that

the firm was using a “bad faith assertion” to

avoid paying her deferred compensation,

“as part of a cynical plan to intimidate and

silence” her.

Even hedge funds with clever managers

and successful long-term strategies stum-

ble occasionally. Many stage a speedy re-

covery. As the number of covid-19 cases in

America rises, the economy continues to

wobble and the spat with Ms Murray esca-

lates, though, Bridgewater’s troubles may

continue to mount. 7

NEW YORK

The most successful hedge-fund firm

ever faces losses and a lawsuit

Bridgewater

Troubled waters

Going for gold

Sources:DatastreamfromRefinitiv;FederalReserve

160

140

120

100

80

2018 19 20

January1st2018=100

Gold, $ per

troy ounce

Euro-to-dollar

exchange rate USdollar,ten-year

inflation-linked

swaprate

Ten-year Treasury yield

4

3

2

1

0

2018 19 20

United States, %

On July 29th the price of gold surged to an all-time high, as the dollar fell to its lowest

level against the euro in nearly two years. Yields on ten-year Treasuries have stayed low,

on fears of a rocky economic recovery, even as expectations of inflation have risen. That

has depressed real yields, making dollar assets less attractive and adding to gold’s lustre.

The dollar dips

N

othing in this world is certain,

mused Benjamin Franklin, except

death and taxes. He never had to contend

with the European Union’s unanimity rule.

Eurocrats have long sought to bolster the

eu’s budget with “own resources”—ie, rev-

enues that accrue to it, rather than cash

handed over by member countries on the

basis of national income. But almost every

attempt to centralise taxation has fallen

foul of a national veto. The last big reform

to eurevenues was over three decades ago.

Some think the club’s coming borrow-

ing splurge will revive the debate. On July

21st the eu’s 27 national leaders agreed to

allow the European Commission to borrow

up to €750bn ($880bn) and dish out the

proceeds, more than half in the form of

grants, to help countries recover from the

covid-19 recession. Repayment will start in

2028; new “own resources”, the leaders

said, should contribute. Once-sceptical

members are now keener. “Countries see

more concretely that taxes will either have

to be collected by the euor included in na-

tional contributions,” says Mario Monti, a

former Italian prime minister who led an

inquiry into own resources in 2017. For fans

of “more Europe”, common taxes on top of

common debt would mark a decisive step

towards fiscal union.

An eulevy on plastic waste may funnel

€7bn a year towards the budget from 2021.

But beyond that, the commitment is thin.

The logic of vetoes has not changed, notes

Eulalia Rubio at the Jacques Delors Insti-

tute, a think-tank. Every proposal is op-

posed by one government or another. One

idea is to direct revenues from the eu’s car-

bon-trading scheme to Brussels. But that

might deprive national treasuries of in-

come; Germany and Poland are sceptical.

Another idea is a “single-market” tax on

BERLIN

A plan to issue much more common

debt revives a debate on common taxes

The European Union

Filling the coffers