Bridgewater adds liquidity to Pure Alpha clone

Bridgewater Associates LP, which narrowed its investment lineup four years ago to just an alpha-generating hedge fund and a risk-parity beta strategy, is poised to launch a more liquid version of the hedge fund.

But potential Bridgewater investors looking for alpha are out of luck: The new strategy — Pure Alpha Major Markets — like the original Pure Alpha hedge fund strategy, will be available only to existing clients. Pure Alpha has been mostly closed to new investors since 2006.

The Pure Alpha strategy has been so successful that the Westport, Conn.-based manager is returning money to its institutional clients in order to keep the strategy within its strictly enforced capacity limit.

By contrast, the firm's beta strategy, All Weather, with $23 billion under management as of Aug. 1, still is open to new investors.

Bridgewater doesn't disclose the size limit on the Pure Alpha approach, Robert Prince, co-chief investment officer, wrote in an e-mail response to questions. But Pure Alpha's growth this year has been extremely strong. Assets managed in the strategy swelled by $14 billion or 32% since Dec. 31 to $58 billion as of Aug. 1. Half of that growth came in July: Pure Alpha's assets totaled $51 billion as of June 30, according to data from eVestment Alliance LLC, Marietta, Ga.

A recent e-mail to clients said the new strategy will invest in “markets that are not capacity constrained.”

“As we plan to return profits from our Pure Alpha strategy, due to being above our conservative capacity targets, Pure Alpha Major Markets is a potential option for clients wishing to reinvest returned assets with Bridgewater,” the client e-mail said.

“Because we are not looking to raise assets and we are otherwise closed to new business ... this is a good way to create a limited accommodation to existing clients whose PA (Pure Alpha) assets have risen as a result of good performance (e.g. we are up about 20% this year),” Mr. Prince said in his e-mail.

Client demand was not behind Bridgewater's decision to carve out the more liquid strategies from Pure Alpha into a stand-alone investment strategy, Mr. Prince added.

According to data from eVestment Alliance, Pure Alpha returned 13.93% in the first six months of 2010 and 22.74% for the year ended June 30, significantly outperforming the HFRI Hedge Fund Weighted Composite index's -0.21% return for the six-month period and 9.17% for the 12-month period.

Mr. Prince stressed in his e-mail that the developed markets approach is “not a new strategy. It is a limited extension of the capacity of existing Pure Alpha for existing clients. It (uses) the same indicators and markets, just (makes) moderately bigger trades in the bigger markets and no change in the smaller ones.”

As a result, Bridgewater doesn't need to add staff to manage the approach. Existing investors will be able to divide their investment between the original and new versions of Pure Alpha, Mr. Prince said.

Sources said the success of Pure Alpha comes from Bridgewater's transformation to a portable-alpha-only manager from one that managed constrained separate account mandates that didn't permit Bridgewater's portfolio managers to move freely among asset classes.

Raymond T. Dalio, founder, president and co-CIO, began the process in 2006. In an interview with P&I at the time, Mr. Dalio said Bridgewater would move all of its clients into its two alternative investment approaches — Pure Alpha and All Weather — and would stop managing single asset class stand-alone strategies (Pensions & Investments, Oct. 30, 2006). Mr. Dalio said Bridgewater resigned from some client accounts, but did not identify those clients or the amount of assets involved.

The move from a diversified money manager to an alternatives manager contributed to the decline of Bridgewater's assets under management by more than half. Bridgewater managed $165 billion as of Dec. 31, 2006, and $73 billion as of Dec. 31, 2009. The firm's total assets rose 7.6% to $79 billion as of June 30, according to eVestment Alliance.

Assets managed in the Pure Alpha approach have more than doubled to $58 billion as of Aug. 1, from $26 billion as of Dec. 31, 2006. Assets managed in All Weather also have nearly doubled to $23 billionfrom $13 billion as of year-end 2006.

Mr. Prince said in an interview in March that the transformation of all of the firm's 100% institutional clients to alternatives from traditional strategies was completed by the end of 2009. He said Bridgewater executives had accepted a few new institutional clients with large mandates that had been on the waiting list to get into the Pure Alpha strategy when the fund had a moderate amount of capacity in 2008 and 2009.

The new version of Pure Alpha has received cautious thumbs-up from sources who applauded the firm's commitment to its own capacity limits.

While consultants at Angeles Investment Advisors LLC, Santa Monica, Calif., still are reviewing the new Bridgewater offering, Michael Rosen, principal and CIO, wrote in an e-mail response to questions: “We have confidence in Bridgewater. If the alternative is a return of cash, this is probably a better alternative.”

Angeles manages about $1 billion for its clients and is a Bridgewater investor.

“A more liquid version of Bridgewater's hedge fund strategy is precisely in line with current investors' sentiment regarding illiquid strategies,” wrote Vidak Radonjic, managing partner, The Beryl Consulting Group LLC, Jersey City, N.J., in an e-mail response to questions.

“The economic climate is highly uncertain — the stock market gyrations demonstrate that every day. Sentiment is against illiquid instruments right now, especially (among) large institutional investors ... As long as the economy stays weak with highly uncertain employment environment, the trend toward "liquids and safety' will continue. Bridgewater has basically developed a vehicle that investors want right now,” Mr. Radonjic wrote.

Added Daniel Celeghin, a partner at Casey, Quirk & Associates LLC, Darien, Conn., a consultant to money managers: “It's good to see that Bridgewater is taking the capacity issue seriously. Many hedge fund managers only pay lip service to capacity limits. I'm sure their institutional clients are happy about this.”

Mr. Celeghin noted in an interview that “it's not common to see a money manager of any kind, more or less a hedge fund manager, give money back. That said, it's very hard to turn down revenue, especially hedge fund revenue. From the business of money management perspective, Bridgewater is probably thinking, "Why turn this money away?' The new strategy is essentially a clone of the original.”