Bridgewater Associates introduced on Wednesday the firm’s first new investment strategy since 1996.
The Optimal Portfolio strategy combines Bridgewater’s Pure Alpha investment process, which debuted in 1991, and its risk-parity beta approach, All Weather, which was launched in 1996, said Robert Prince, co-chief investment officer, in an interview.
Mr. Prince and his Bridgewater colleagues laid out the new strategy to its investors on a conference call on Wednesday morning. The new strategy will be available only to the firm’s existing all-institutional client base.
Bridgewater’s research efforts over the past couple of years have focused on risk premiums and other drivers of return, Mr. Prince said.
“We started to look closely at the interconnected systems,” Mr. Prince said, which led the Bridgewater research team to an examination of long alpha positions in the Pure Alpha strategy and long beta positions in All Weather. The result was a conviction that alpha short and market-neutral positions might be additive in a portfolio that integrates both strategies.
“We have never designed our alpha strategy to specifically relate to the beta strategy before,” Mr. Prince said but added that research showed that by doing so, “profitable shorts on some of the long beta positions can add a measurable return.”
“We are as good at longs as at shorts,” Mr. Prince said, and when risk premiums are not attractive, the strategy will hedge those positions through shorts.
The optimal portfolio strategy is expected to have a net annualized total return of 8.5% with a 10% risk level, he said.
One advantage of the new strategy is that it adds more investment capacity for Bridgewater: The original global iteration of Pure Alpha has been mostly closed to new investment for eight years and the strategy’s more liquid version, Pure Alpha Major Markets, for three years.
Mr. Prince said extensive testing showed that the new Optimal Portfolio strategy’s application of the Pure Alpha approach showed “no adverse impact” on the existing alpha portfolios.
Bridgewater managed a total of $163 billion as of Aug. 31, with assets split equally between All Weather, $82 billion, and Pure Alpha, $81 billion.
