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

Ray Dalio is a Wall Street legend. But to the Orange County Employees Retirement System (OCERS), the story of Dalio and his hedge fund firm Bridgewater Associates has grown stale.

Unhappy by what the California asset allocator terms the trailing performance of his flagship hedge fund, Pure Alpha, OCERS has placed the fund on its watch list, which is sort of like probation.

The Orange County pension plan ($20.8 billion in assets as of mid-year) and its consultant, Meketa Investment Group, say they will continue to monitor the hedge fund’s returns and then judge whether it should stay or go. The Pure Alpha position with OCERS is $175 million, just over 6% of the pension operation’s assets.

Molly Murphy, the California plan’s CIO, stressed in a statement to CIO that this step is not necessarily curtains for Pure Alpha. “We continually assess all of our investment managers and some stay in the portfolio and come off watch, while others do not and are terminated, but it is not prescribed,” she said.

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By Meketa’s estimate, the Bridgewater hedge fund has returned an annualized 4.5% since 2005, about 2.5 percentage points less than its benchmark—which is the yield of a Treasury bill plus 5 percentage points. Its falloff has come since 2015, Meketa found in its report, and from then it has fallen short over three-, five, and seven-year periods up to June 30 this year. For 2021’s first half, Pure Alpha’s 1.9% increase was 0.7 point below the benchmark’s showing, Meketa reported.

During Pure Alpha’s 16-year tenure with Orange County, Bridgewater has delivered around 6.4% annually for OCERS, slightly more than doubling its money, according to a Wall Street source sympathetic to the firm. Plus, the person said, it has had just one negative year with OCERS. But the S&P 500 has returned a bit more, 8.8% per annum, over that span. Pure Alpha has generated a reported annual 10.4% net of fees since its 1991 inception.

Neither Bridgewater nor Meketa would comment on the contretemps.

OCERS signed on with Pure Alpha in May 2005 and for the next 10 years, the hedge fund outperformed, Meketa found. Then the performance ebbed, the consultants’ study stated, due to a “relatively stable macro environment and fewer large price changes across broad markets (e.g., equities, interest rates, foreign exchange, and commodities).” The longstanding appeal of Pure Alpha has been its lack of correlation to standard asset classes, mainly stocks, and its attention to large shifts in global economic forces, such as economic growth or contraction and currency movements.

This is a real comedown. The Dalio fund has dazzled investors for years with its prescient moves, such as sidestepping the 2001-03 dot-com bust and the 2008-09 global financial crisis. In each case, parent Bridgewater, the world’s largest hedge fund firm, has touted its superior analysis to see what is coming that’s bad—or good. Pure Alpha clocked a 9.5% performance in 2008, when the S&P 500 plunged by a third, and capped that with a blow-out 45% in 2010.

The fund, though, last did well in 2018, up 14.6%, when stocks started to nudge upward as the Federal Reserve reversed its rate-raising regimen. After that, the hedge fund started to struggle, apparently not catching the dramatic equities turnaround after the early 2020 pandemic-induced slump.

Dalio has a daunting standing in the investing community, and his views command respect. Certainly, keeping OCERS as a client is not vital to Bridgewater, which oversees $105 billion in hedge fund assets. The OCERS position is a fraction of that. Still, no one wants to be canned.

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Tags: Bridgewater Associates, Hedge Fund, Meketa Investment Group, Molly Murphy, OCERS, Orange County Employees Retirement System, Pure Alpha, Ray Dalio, S&P 500, Stocks

The investment portfolios for the University of California (UC) added $38 billion over the fiscal year ending June 30 to raise their asset value to $168 billion, a 28.9% increase over the prior year. It was the largest one-year gain in the endowment’s history.

The investment portfolios include the UC endowment, which returned 33.7%, and its pension, which was up 30.5%.

The endowment attributed the record returns to the strong performance of its private and public equity investments, which returned 58.7% and 41.1%, respectively, during the year.

“In so many ways, this past fiscal year was intense, and humbling,” CIO Jagdeep Singh Bachher said in a statement. “Beyond the tumult of the pandemic, the social and geopolitical unrest, with the effects of climate change in sharp relief, we made some bold moves to capture the unique opportunities a surging market provided.”

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UC’s portfolios have grown by $73.1 billion, or 77% since 2014, when Bachher was named CIO of the university system. Since then, the UC Investments team has also generated $5.2 billion in returns over its benchmarks and saved $2.2 billion in costs by reducing its number of external managers and increasing direct co-investments in companies. UC Investments said it has cut the number of its key external partnerships to 50 today from 280 in 2014.

The university’s general endowment pool was worth $19 billion as of June 30, a $5 billion increase from the previous year, and a $10.7 billion, or 129%, increase since 2014. The one-year net return was 33.7%, which beat its benchmark’s return by 4.2%, and its three-, five, and 10-year annualized returns were 14.9%, 13.7%, and 9.9% respectively. Over the longer term, the endowment pool reported 20-, 25-, and 30-year annualized returns of 7.8%, 8.9%, and 9.7% respectively, all of which surpassed their policy benchmarks.

The asset value of the University of California pension rose $20.8 billion from the previous year, thanks to a one-year net return of 30.5%, which was 2% above its benchmark. The pension has three-, five-, and 10-year annualized returns of 12%, 11.6%, and 8.9%, respectively. Over the longer term, the pension has 20-, 25-, and 29-year annualized returns of 6.9%, 8.1%, and 9%, respectively, all of which met or exceeded their policy benchmarks. Private and public equity investments were also the top-performing asset class for the pension, returning 54.7% and 41.8% respectively for the year.

“Jagdeep and the UC Investments team, working entirely remotely, stayed calm and focused,” UC Regent Investments Committee Chair Richard Sherman said in a statement. “We ended up significantly changing our asset allocation—by increasing our exposure to equities—in the middle of the pandemic. It proved to be the right move.”