Bridgewater: When Good Ideas Go Bad

(Editor's note: Hedgeye Jedi Christian Drake from our Macro Team offers some thought-provoking observations regarding Bridgewater's issues with its All Weather fund (see Bloomberg story "Dalio Patched All Weather’s Rate Risk as U.S. Bonds Fell" for additional background)).

When good ideas go bad……

Bridgewater: When Good Ideas Go Bad - Stormy Weather Saguaro Cactus

If you hold a canonical 60/40 portfolio of stock/bonds, the risk adjusted exposure to bonds is not 40% - it's something less than that given that bond volatility/risk is lower than that of equities.  If however, you lever up the bond portfolio you can magnify fixed income returns, equalize equity & fixed income risk, and increase risk adjusted portfolio returns.  This is the basic idea of Risk Parity (ie. Bridgewater) and risk parity style funds

 

Risk Parity is a cool idea – it is an especially cool idea when you are levering up exposure to an asset class in the midst of a 35-year bull run. 

 

“All Weather” strategies, however, suddenly see only rain when fixed income goes convex and cross-asset class correlations tighten (ie. you are levered long falling bond prices and stocks & commodities are declining as well) such as what happened in June post the Taper announcement.  Risk-parity strategies got smoked on both an absolute & relative basis.

 

Decades long Queen Mary based correlation strategies need to be re-thunk &/or remixed when queen mary starts her secular journey the other way.   

 

AQRIX/ABRYX are the lead risk parity mutual funds and a Risk Parity ETF is waiting in queue for SEC approval – keep an eye out for that as a short candidate if we move towards getting a repeat of June. 

 

…Just some thoughts as them there #Rates keep arisin’

 


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more