Dalio, Making the Case for Pessimism, Has Thrived This Year by Selling Short

The philosophical hedge fund honcho scored big in the first half, betting against European companies.



Ray Dalio, the billionaire hedge fund impresario and lately a public philosopher, has some advice for investors, both pros and amateurs: Don’t be too optimistic. Sometimes, in a struggling economy, it pays to be a pessimist, wrote the founder and co-CIO of the world’s largest hedge fund firm, Bridgewater Associates, in a LinkedIn post.

 

He ought to know. Bridgewater’s flagship fund, Pure Alpha II, clocked a 32.2% gain in this year’s first half, according to a source familiar with the firm. A chunk of that return appears to be from the fund’s shorting stocks in Europe, where equities are under pressure due to energy shortages and other fallout from the Russia-Ukraine war.

 

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In June, the fund reportedly doubled its short positions in European companies, to $10.5 billion. Its targets were said to include French health-care company Sanofi (down 7.5% since June began), German software maker SAP (off 13%) and French oil giant TotalEnergies (negative 17%).

 

This year, the fund has made money in 65% of the global markets it is invested in, the source said. In addition to shorting, it has logged gains in such areas as commodities, sovereign debt and emerging market currencies.

Bridgewater takes pains to note that Dalio, 72, no longer runs the firm. He has handed off leadership to a younger generation. An investment committee decides where Bridgewater puts its money. Dalio is not on that panel, but serves as what the organization calls its “mentor,” and still is involved in company operations. His investment philosophy remains a touchstone for its strategy. 

 

Pure Alpha, a macro fund that bets on large economic trends, had some tough years in the 2010s, but Bloomberg data show it was ahead 8% in 2021, and then came this year’s blowout.

 

Hedge funds in general are in the red this year—falling 5.5%, according to Hedge Fund Research—although that’s far less than the stock market fell, with the S&P 500 declining 20.2%.

 

Over the long pull, Pure Alpha has a fine record. Since its 1991 inception, its total return has risen 11.4% annually, net of fees.

 

“Always betting on up, which is what almost everybody does, is both a mistake for investors and damaging to the economic system,” Dalio wrote, in the latest of a series of posts giving investment advice.

 

The easy money of recent years encouraged many overly optimistic businesses to take on large amounts of debt, which must be dealt with now that interest rates are climbing, he indicated.

 

Due to high inflation, rate boosts are the order of the day for the Federal Reserve, and also for the European Central Bank, as well.

 

Related Stories:

 

Ray Dalio Is Now Ranking Economies by Their Strengths and Weaknesses

 

Why Is OCERS Looking at Dumping Ray Dalio’s Prized Hedge Fund?

 

Dalio’s and Summers’ Dim View on Inflation, Markets, the Economy

 

 

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