Bridgewater Lost Almost A Year's Profit In Two Months

The media, citing people briefed on the matter, reported on Friday that Bridgewater's Pure Alpha fund plunged 13.2% in the fourth quarter that ended November 25, and its year-to-date gain fell to 6%. No one would have predicted this outcome before October. Just 2 months later, the twist in this plot is too shocking. However, this phenomenon is also the norm in the market.

In the first half of the past year, US funds raised its interest rates constantly, while Europe was deeply involved in the Russian-Ukrainian conflict and the energy crisis. Based on this, Bridgewater Fund was bearish on the European and American economies. Firstly, it shorted European and American corporate bonds with a basket of credit derivatives in April. And then betted heavily on US dollars to short European stocks in June, turning into the largest short position in the European market. The scale of its short position even reached $10.5 billion by the end of June. After a brief partial profit stop in August, it quickly increased its short position again in September to short European stocks.

At this time, Bridgewater has reached its peak of the year. Pure Alpha II has achieved a return of 32% in the first half of this year, which is its best annual performance since 2010, and gains for the full year have increased by about 27%. It is worth mentioning that when Mr. Dalio stepped down, the annual increase of the Fund was just over 22%. Perhaps the current Bridgewater directors are more or less complacent? Loaded up again after taking a profit in August? That is what the charming market is, and no one knows who is the winner until the end.

You see, the tragedy began to unfold in October. European stocks began to bottom out. Since the pan-European Stoxx 600 index hit a stage bottom of 380.04 on September 29, it began to rebound violently against the trend. As the chart displayed below, the increase has exceeded 16% as of December 5. In the end, we have also witnessed a large drawdown from Bridgewater, perhaps even larger now than that at the end of November.

The gorgeous performance of Dalio is undeniable, but this is not a trend trading that retail investors are capable to imitate. For one thing, global macro investment requires deep economic expertise, and most traders cannot see the world the way he does, let alone global investment, even if they study it all their lives. But what we can do is be the most professional in a certain industry. And for another, do not put the eggs in the same basket, which indicated that diversified investment is needed, especially those commodities with low correlation. It sounds like it's not hard to achieve, but investors can make it. Finally, if your prediction was wrong, all your efforts will be in vain. However, the most valuable thing for Dalio to learn is to trade your plan and develop an investment project that matches your professional knowledge goals. Keep the habit of unifying your knowings and doings, and perhaps you will gradually be wealthier over time!

When I first entered the investment industry, Dalio's autobiography seemed confusing, who would like mistakes? However, the more I experienced it, the more I felt it. As long as you stay in this market for a day, you will keep making all kinds of mistakes. Bad things will happen to all of us sooner or later, and how we deal with them determines whether we succeed or fail. As he proposed pain + reflection = progress, pain is the norm in trading.

"China is going through drastic changes unseen, most people seriously misinterpret these changes, and some assets have been sold off as a result. Now you can find some extremely valuable assets in the Chinese market, and the price them is very attractive. It is important to allocate part of the capital to China.” Dalio said recently. It is difficult for a ship to turn around, and so is a large amount of money to shift their trading direction. The two months when Bridgewater's short performance in European stocks plummeted, exactly coincided with the sharp rise of the Euro and RMB. Could it be that Bridgewater has begun to admit its mistakes? Stop loss is a technique while taking profit is an art.

Looking ahead to 2023, it may be a year that China is expected to come out of an inflection point. Since the pandemic, the economic cycle in China and globally has been misaligned. Compared with advanced economies in the world, China's economy has enjoyed continuously low-interest rates and inflation. As the global environment has also begun to recover gradually, better measures have been issued by China for several problems that the market is most worried about. First of all, the pandemic prevention and control measures have undergone qualitative changes, and the rest is a matter of time, which is the best medicine to restore the confidence of private enterprises. Secondly, in terms of real estate, the introduction of the "Financial 16 Rules" has stabilized market sentiment and opened up the financing of listed real estate enterprises, which is a great benefit for investors. Finally, the external environment is also a factor for market considerations, such as the Sino-US meeting, the Sino-German meeting, etc., which makes China play a key role in future geopolitical stability.

This may not be good news for Chinese bonds. The trend of the RMB exchange rate next year is likely to keep track of economic fundamentals, which is supposed to be an appreciation trend. Therefore, the current attractiveness of Chinese government bond yields will be much lower than that of Europe and the United States. The market has already priced that rate hiking of the dollar in 2023 will be paused, or even cut. In the context of a sluggish global economy, the market would rather look for opportunities with a more certain return than uncertainty, including US investment grade bonds with yields of about 5% and some high-yield short-duration bonds. Besides, Eurobonds and the turning of global bond funding seem under consideration as well. A large number of capital was exported in the years when the ECB's interest rate was 0, but now the yield of European bonds is higher than that of US Treasury bonds (after the exchange rate hedge), so perhaps a considerable amount of money will return to the European market, and the appreciation of the Euro can be expected.

For the equity market, it may be a good start. However, after major trauma, Chinese investors will need a period of time to recover gradually, and they are going to be more cautious at the same time. Looking ahead, the sector differentiation may deeply widen, but energy security, food security, and consumption will never go out of style. In Bridgewater's holdings, stocks of consumer goods are still "favorites", accounting for as much as 40%, followed by financial stocks, which is a better reference.

For commodity markets, will copper and iron as barometers count on Chinese real estate? Unfortunately, it is the best result that real estate is able to survive now. More development in the future of real estate will lead to a geometrical decline. It is suggested to bear the entire non-ferrous metal and black series. And precious metals, with no additional yield, are currently at a high level in history. If it fails to maintain going upwards, the only way is to fall. The best way is to go short the gold-silver ratio (short gold and more silver) that I proposed in October. The differentiation of the energy and chemical industries will be relatively large, but the general direction is still too short for industries with large profits and long serious losses.