For the first 10 years of Bridgewater’s existence it didn’t manage money. The fund manager, now regarded as the world’s biggest hedge fund, was built on its research, content and advisory expertise, with Ray Dalio, Bob Prince and the team working one-on-one with corporate executives and policy makers to help solve problems. And now, as asset owners increasingly look to managers for “partnerships” rather than transactional relationships, Bridgewater’s advisory capabilities are coming to the fore. In this environment there are many problems to be solved.
“The key thing right now is that the problem set has changed,” says Kyle Delaney, the firm’s president and chief commercial officer (pictured middle). “Most people are starting to recognise the next 10-20 years are going to be very different from the last. This has required a re-thinking of everything relative to what people know and have experienced and is bringing into question things like how to be diversified, which is the most critical and essential thing we have in large part taken for granted in the last decade.”
Bridgewater is talking to clients at the foundational level about what their goals are and what needs to be done to achieve them because many investors are dealing with increased complexity and an environment they have never had to deal with in their investment careers. Brian Lawlor, co-head of Americas in the client service department (pictured right), says the current environment has caused investors to re-think their investment beliefs and how they allocate risk in their portfolio.
“The focus for now is on advice, understanding their problems and helping clients work through those. We are sharing what we have done and our approach to problem solving,” Lawlor says.
Bridgewater’s research is focused on understanding how the world works and the impact on markets. An enormous amount of information is needed for that and having access to data is more important than ever.
Bridgewater: The technology provider
Established in 1975 by Dalio in a two-bedroom New York City apartment, the firm’s history was embedded in currency and interest rate advisory.
Risk management advice was at the foundation and remains an important tool both internally and now for clients as well. Problem solving internally at Bridgewater has centred around a robust risk management tool which is now available to clients to stress test their portfolios across different dimensions.
“Clients are recognising what is coming down the pipe in the investment environment but they have had a hard time modelling how those environments might impact their portfolio. Because we’ve gone back hundreds of years, and we’ve looked at all different kinds of episodes of inflation and conditions like stagflation, this helps them think through what they can do today to get ahead of that as efficiently as they possibly can,” Delaney says.
It’s an increasing part of the relationship with clients, Lawlor says, and Bridgewater is working on custom technology solutions for clients to allow them access to better insights into the macro environment where inflation, drawdowns, cybersecurity, and liquidity top the list of concerns for clients.
“We’re also thinking about other tools we can make available for our strategic partners,” Lawlor says, which is likely to include technology solutions for data integration.
Throughout the firm’s history problem solving for clients – originally around currency and risk management – has led to product not the other way around.
It’s one of the reasons the firm limits the number of clients it works with, growth is measured in mind share and an ability to help clients solve problems. Product may or may not come out of that.
“As we have gone through drawdowns the feedback we have had from clients is they value the partnership and the impact we can have across the entirety of the portfolio. That makes them feel like they want to work with us,” Delaney says. “We had a drawdown in the first quarter of 2020, which was quite painful, but the research we did at the time on Covid-19, inflation and low interest rates kept us even more relevant to the C-suite.”
Bob Prince, the co-chief investment officer (pictured left) who could also be described as co-chief problem solver, says one of the indicators of a successful relationship with clients is if “the top of the organisation brings their most important problems to you”.
Stagflation and what to do about it
Prince believes one of the most important problems for markets and for clients to understand at the moment is the prospect of stagflation and the implications for portfolios.
For a long time Bridgewater’s line has been that current inflation is not transitory but is a monetary inflation, something not seen in a long time.
“We’re not talking just about money supply, we’re talking about total credit and total spending and looking in a different way at how an economy works,” Prince says.
He says the current difference between the upward pressure on inflation and the downward pressure on growth relative to what is discounted in markets is the widest it has been in the past century.
The root cause of the expected stagflation, he says, is the excessive level of credit and money growth and until that is drained nothing will be fixed.
“We have to nurse our way out of this. Central bankers would probably not shrink the balance sheet as fast as this year and would need to work to raise the interest rate a little faster. The net of that would be a better blend of financial and real economy performance.”
In terms of investors’ allocations in such a market, Bridgewater recommends starting by looking at the environmental biases of assets to growth and inflation.
Investors should favour assets that benefit from inflation, like inflation-linked bonds. Equities, he says, perform badly in stagflationary environments and investors need to recognise that.
“In stagflationary environments equities have been the worst-performing assets, in line with their vulnerability to both falling growth and rising interest rates,” he says.
Solving problems requires innovation
At the last tightening in 2017 Prince recalls a CIO describing their concerns and the vulnerabilities they had in the environment.
Bridgewater took on a project to help the client understand the environmental biases of their portfolio, it turns out they had a bias to do badly if there was a rise in inflation.
“If you have a vulnerability you are worried about in [the] near term you can either fix it permanently by shifting your allocation or you can make some moves tactically based on a view of where we are in the cycle,” Prince says. “I suggested some things but they came back and said they couldn’t do them well enough so I said maybe we could help them with that.”
This was a risk for Bridgewater as it meant taking a particular position for a certain environment, where traditionally its portfolios are unbiased and designed to do well in all markets.
“We took on the mandate but we could only do this type of thing where we have a great relationship. The portfolio was set up only to perform in down times so most of the time it would underperform. We spent six months with them building out a risk management plan and accurate expectations.
At the moment the manager is working with a client to re-orient an asset allocation that had a heavy equities bias and shift that towards using equities as an absolute return, more consistent, resilient allocation. That approach has now also been incorporated into the firm’s approach.
“We have had a lot of innovations over the years we just always thought primarily in terms of our best alpha and our best beta so when we come up with new insights and ways to make money we’ve chosen to add them to our alpha strategy rather than become a product shop,” Delaney says.