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Hedge Funds

Clients hail Bridgewater ownership change

Eileen Murray said six seed partners are designing the structure and function of the partnership.

Shift to partnership structure comes as firm details offshore China fund

Bridgewater Associates LP's move to a partnership structure is a welcome development, said asset owners, investment consultants and industry pundits.

Bridgewater, based in Westport, Conn., wrote of the ownership shift to its 300 clients in a June 28 letter from the firm's co-CEOs David McCormick and Eileen Murray, which was obtained by Pensions & Investments.

Institutional investors interviewed by P&I said the company has kept them informed about its intentions to move to a partnership and they like the move.

Plans call for the company to create a partnership in which about 50 partners and a number of external stakeholders will share ownership of the firm. Bridgewater has 1,500 employees.

"Whenever you open up an organization to broader employee ownership, it's a positive," said James C. McKee, senior vice president and director, hedge fund research, at investment consultant Callan LLC, San Francisco.

"A real, tangible ownership structure creates a much broader base that will be more sustaining for the money manager," Mr. McKee said.

The change is the next phase in a 10-year transition plan, begun in 2010, to replace Raymond T. Dalio, the firm's iconic, 68-year-old founder, in his administrative roles, Ms. Murray said in an interview.

Mr. Dalio has been steadily handing over control of the firm in the past few years.

He stepped down as co-CEO in the first half of April 2017, retaining co-chief investment officer and co-chairman roles.

Bridgewater managed a total of $164 billion in hedge funds and risk-parity strategies as of May 31.

Collectively, Mr. Dalio and co-CIOs Robert Prince and Greg Jensen, are majority owners of the firm. Fifty to 70 employees now hold phantom equity ownership in the firm.

Institutions, including the $151.4 billion Teacher Retirement System of the State of Texas, Austin, and the C$95 billion ($71.6 billion) Ontario Municipal Employees Retirement System, Toronto, and GIC Private Ltd., Singapore's sovereign wealth fund, own minority shares.

Texas Teachers paid $250 million in March 2012 for a 2.4% ownership stake that totaled $384 million as of Dec. 31, per data provided by the pension fund, putting Bridgewater's value around $16 billion.

Outstanding issues

"Many things remain to be decided" about the structure of Bridgewater's partnership model, Ms. Murray said, noting a group of six seed partners is "essentially the design committee" for the partnership.

The seed partners, with input from the other partners, known as provisional partners, will determine the structure, function, members and responsibilities of the partnership, Ms. Murray said. The provisional partners will elect three members as representatives on Bridgewater's board of directors.

Equally important to the partnership plan is "extending the economics of company ownership to governance" to establish standards for new, existing and retiring partners, Ms. Murray said. The goal, she added, is to create an ownership and governance structure that will ensure "Bridgewater's principles and culture remain for the next 50 to 100 years."

Bridgewater hasn't set a time frame for the launch of the partnership, she said, noting "we need to get it right."

The move to a partnership model from ownership by a single owner or small group of founders is "very common," especially among boutique and specialty managers, said Kevin P. Quirk, principal at Casey Quirk, a practice of Deloitte Consulting LLP, Darien, Conn.

Mr. Quirk said the partnership structure provides a way to buy out the original owners and to "incent the next generation of executives to change the way the firm is going into the future. It has to be viewed as a very strong positive when asset managers massively expand ownership among senior employees."

Texas Teachers said in an emailed statement that the firm kept TRS' investment officers apprised of its proposed partnership expansion during the years it has held an ownership stake.

"Our pricing policy is unchanged and we plan to continue our partnership with Bridgewater," said Jerry Albright, CIO, in the statement

Bridgewater managed a total of nearly $2.05 billion as of Dec. 31 in five strategies for Texas Teachers.

Bridgewater's move received a thumbs-up from School Employees Retirement System of Ohio, Columbus.

"From our investment staff's perspective, expanding the ownership to include more employees is a favorable development," said Timothy Barbour, a spokesman, in an email.

Bridgewater managed $54 million for the $14.3 billion fund as of May 31.

China All Weather Offshore

Against the backdrop of formulating the ownership changes, Bridgewater in April launched its China All Weather Offshore Fund, Mr. Prince said in an exclusive interview with P&I.

The fund is open to a select group of Bridgewater's existing non-Chinese domiciled investors and combines investment in Chinese stocks and bonds with global inflation-linked bonds and commodity futures when necessary using the firm's risk-parity strategy. The yuan-dominated strategy is managed from the firm's Connecticut headquarters.

"The China All Weather fund is a small part of a much bigger picture, which essentially is the emergence of China and other Asian countries into an economic zone equal in size to the U.S. and Europe producing 30% of world gross national product," Mr. Prince said, noting China offers investors a third major economic zone in which to invest.

"The opportunity for non-Chinese-based investors is the diversification potential of investing in a third major economic zone which will be fundamentally lowly correlated to other markets," Mr. Prince said.

Mr. Prince said the return stream of the China All Weather Offshore strategy is attractive but more importantly "the fund is a portal to understanding Chinese markets," something Bridgewater's institutional clientele are eager to capitalize on.

Bridgewater will provide investors in the China All Weather Offshore fund with substantial education, research and support for additional investment in China to a "degree which precludes mass adoption by Bridgewater clients. There's a time commitment for Bridgewater in doing this," Mr. Prince said.

Rather than offer investment in the China fund to all existing investors, Bridgewater is inviting into the strategy individual clients with which it already has a strategic partnership, such as Texas Teachers. Such partnerships involve similarly consultative relationships between the firm and its investors.

TRS' CIO Mr. Albright, in an email, declined to comment on whether the fund had or was considering investing in Bridgewater's offshore Chinese risk-parity fund.

Mr. Prince said two existing investors which he could not identify — a pension fund and a sovereign wealth fund — have invested a total of $1 billion in the fund and Bridgewater is talking to other investors.

Bridgewater also has been prepping a China All Weather Onshore Fund for its China-domiciled investors that invest in Chinese securities using the firm's risk-parity approach.

Bridgewater received the go-ahead to provide the fund to qualified Chinese institutional and high-net-worth individual investors through successful registration as a private securities investment fund manager with the Asset Management Association of China on June 29.

The launch date for the initial onshore All Weather fund has not been set, but regulations require that Bridgewater introduce an investment vehicle within six months of the registration date.

Eventually, as Chinese regulations relax capital restrictions on how much Chinese residents can invest outside the country, Mr. Prince said Bridgewater will launch a global version of the China All Weather Onshore Fund.

Bridgewater will manage the onshore fund in China and has established offices in Shanghai and Beijing.