New Hedge Fund Reality Explained by Bridgewater Overhaul

The company implies that it lacks confidence in its ability to consistently uncover opportunities for any amount investors wish to give it by restricting the size of its funds. Ray Dalio, the company's founder, changed that.

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I stated in an article from October that the retirement of Ray Dalio, who founded Bridgewater Associates and oversaw it for nearly 50 years, marked the end of a significant period in the history of hedge funds. The preconceptions of hedge funds are still centered on the famous investors who founded their firms in the 1970s, the last of whom was Ray Dalio. Bridgewater's new leadership are currently reorganizing the company to more closely resemble the newest hedge fund generation.

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The most expressive moniker for his fund was chosen by Dalio: Pure Alpha. Beta exposure, or the projected return the market delivers to investors for passive exposure to important economic indicators like equities values and interest rates, is typically provided by traditional asset managers and index funds. The fact that returns from "alpha" are uncorrelated with key market variables makes them more valuable because they are insulated from the crises that lead to stock or bond crashes. When beta and alpha techniques are combined, the returns can be higher while carrying less risk than passive exposure in conventional index funds.

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However, very few hedge funds today guarantee 100% alpha. Normally, they guarantee a certain kind of exposure, such as managed futures, global macro, convertible arbitrage, etc. Numerous of these tactics combine alpha and beta. Capacity is generally limited by large budgets. Only some convertible bonds—of which there is a fixed supply—are appropriate for convertible arbitrage. A management might not be able to invest additional funds, depending on the state of the market and the number of other convertible funds.

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Pure alpha, though, is a promise rather than a plan. It can go elsewhere if there aren't any promising chances in convertibles. The fact that Dalio's fund never set investment limits suggests he was certain he could always uncover opportunities — or employ individuals who could — for any amount investors were willing to pay him. Until institutional investment rose in the late 1990s, this was what the majority of hedge fund investors desired: a self-assured entrepreneur who would create a company to find alpha, in any quantity, across all markets.

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Capturing the scale of Pure Alpha is one of Dalio's successors' initial moves. The release also stated that Bridgewater would create more funds with exposure to Asia, add products that leverage individual equities to convey macro views, and increase its sustainability offerings, so the intention is not to reduce the assets managed by Bridgewater. In order to find alpha generally, Bridgewater is no longer requesting that investors adhere to Dalio's beliefs. Instead, it seeks out particular kinds of alpha in advance of the money flowing in and packages them to compete with comparable products from other hedge fund managers to fit into particular institutional portfolio niches.

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All Weather, another significant fund managed by Dalio, is a pure beta fund that is far more diversified and leveraged than conventional index funds with the goal of generating respectable returns even in significant market downturns. Although the investments it makes are practically infinitely available, this is also being capped. This makes Bridgewater more comparable to its younger rivals among large institutional hedge fund management firms, along with other changes made in the last three years, such as increasing dependence on committee decisions and taming its unconventional working culture.

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Bridgewater must decide if it can keep whatever formula made up the 40-year streak of great performance while abandoning the mindset and values of the time. For the rest of us, the question is whether specialized alpha funds managed by conservative institution committees can replace the role performed — for better or worse — by eccentric, autonomous market wizards who influenced markets and the economy for almost fifty years.