Updated with clarification
Bridgewater Associates Inc.'s decision late last year to put its $21 billion All Weather strategy into “depression mode” could provide an opening for a bevy of new competitors looking to pick up market share.
Launched in 1996, All Weather remains the marquee name among diversified beta strategies, which leverage up exposure to higher Sharpe ratio-lower return asset classes, with the promise of equitylike returns and bondlike volatility.
While the Westport, Conn.-based firm had the field to itself for the better part of a decade, competition is heating up.
Over the past three or four years, AQR Capital Management LLC, Greenwich, Conn.; Barclays Global Investors, San Francisco; and PanAgora Asset Management Inc. and Putnam Investments, both in Boston, all launched competing products. More recent entrants include First Quadrant LP, Pasadena, Calif.; Invesco Ltd., Atlanta; Mellon Capital Management Corp., San Francisco; and State Street Global Advisors, Boston.
“We've been recommending these strategies for years,” but it's only been the past year or two where the universe has really started to develop, said Joseph Nankof, a partner with Norwalk, Conn.-based investment consultant Rocaton Investment Advisors.
While it remains the 800-pound gorilla, Bridgewater's decision to pull the plug on leverage late last year, when the financial system appeared to be teetering on a precipice, rankled some clients.
Bridgewater “panicked at the most negative inflection point” of the market's decline, walloping performance by delevering at the worst possible time, said one All Weather client, an executive from a defined benefit plan with more than $1.4 billion in assets, who asked not to be named.
Bridgewater partially reversed course in early spring, as the recovery was picking up steam, once again incurring heavy costs to lever up the portfolio at a less-than-opportune moment, the executive said.
Performance tracker eVestment Alliance, Marietta, Ga., reported that the All Weather strategy lost 7.7% of its value in the year ended Sept. 30. It trailed its benchmark — 40% MSCI World/60% Citi World Government Bond index — by 15.71 percentage points.
In an interview, Robert Prince, Bridgewater's co-chief investment officer, conceded the All Weather portfolio would have had higher returns over the past year — roughly double its actual 16% gain for the 12 months through Oct. 31 — if it hadn't gone into “safe” mode. (The dramatic shift from a decline for the year through Sept. 30 to a gain for the year through Oct. 31 reflected October 2008's figures, when the S&P 500 index tumbled 17%, falling out from the rolling 12-month performance data.)
Nonetheless, the decision to act on the “depression” trigger Bridgewater put in place eight years ago was the right one at a moment of tremendous uncertainty, when rock-bottom interest rates were constraining economic policymakers' ability to steady a credit system falling into a self-reinforcing debt-liquidation spiral, Mr. Prince said.
Only the Federal Reserve Board's decision in March to begin aggressively printing money finally turned the situation around, he said.