In theory, hedge funds are designed to insulate investors from the type of market downturns that U.S. investors have experienced in 2020. Unfortunately for Bridgewater Associates investors, the world’s largest hedge fund appears to have gotten caught off guard by the coronavirus outbreak.
The Financial Times reported over the weekend that Brigdewater’s flagship fund, the Pure Alpha Fund II, is already down 20% year-to-date in 2020. In a statement, billionaire founder Ray Dalio said the fund dropped the ball during the current crash rather than making money like it did in 2008.
“We did not know how to navigate the virus and chose not to because we didn’t think we had an edge in trading it. So, we stayed in our positions and in retrospect we should have cut all risk,” Dalio said.
In a note on Monday, Dalio said the combination of 0% interest rates and the uncertainty of the COVID-19 outbreak is troubling.
“While it is an extremely serious infectious disease and that will produce many harmful economic impacts, these things alone don’t scare me; however, when combined with long-term interest rates hitting the hard 0% floor, that really worries me,” Dalio said.
Dalio famously predicted the global financial crisis back in 2008. Dalio’s hedge fund has been the largest in the word since 2011.
In an opinion piece posted on LinkedIn, Dalio said the U.S. government will need to follow up the Federal Reserve’s interest rate cuts with an aggressive stimulus program aimed at the sectors of the market most impacted by the outbreak.
“Thus far, there has not been much debt support to industries that would go broke due to this shock though President Trump has called for Congress to authorize an additional $50 billion in subsidies for loan to SMEs through the SBA. This could free up a few hundred billions in loans; however, it's not big enough and it’s not clear whether this measure will garner congressional Democrats’ support,” Dalio wrote.
The debate over what and how much stimulus the government should provide to private companies is a familiar one to investors that were around during the financial crisis back in 2008. While the $700 billion Troubled Asset Relief Program was extremely controversial at the time, it ultimately helped stabilize the economy and eventually even generated a large profit for U.S. taxpayers in the long-term.
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