Bridgewater strategy pulls in $10 billion in months

Bridgewater Associates LLP has pulled off a feat few other money managers have done: Its newest strategy attracted $10 billion from existing institutional clients in less than a year.

Some Bridgewater clients — including Teacher Retirement System of Texas, University of Michigan and Pennsylvania Public School Employees' Retirement System — have written large-ticket allocations to the Optimal Portfolio, the Westport, Conn.-based firm's first new investment strategy since 1996.

Robert Prince, Bridgewater's co-chief investment officer, introduced the firm's new alpha-meets-beta strategy during a client conference call last September.

Bridgewater researchers found that integrating the company's iconic Pure Alpha strategy with its equally well-known All-Weather risk-parity beta approach and adding alpha short and market-neutral positions created a portfolio expected to produce a net annualized return of 8.5% with a 10% risk level.

Bridgewater officials declined to be interviewed, citing SEC restrictions on soliciting business for a private investment fund.

The Optimal Portfolio is only being offered to Bridgewater clients.

The Optimal Portfolio “aims to combine (Bridgewater's) best beta with tailored, value-adding and risk-reducing alpha, producing a high, consistent and diversifying return stream,” said Susan E. Oh, senior portfolio manager at the $52 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, in a report presented to trustees at an April 30 meeting.

Trustees approved a $600 million investment in Bridgewater's new strategy at that meeting.

Investment staff of the $10 billion endowment of the University of Michigan, Ann Arbor, invested $250 million in the Optimal Portfolio in January. Kevin P. Hegarty, executive vice president and chief financial officer, in a report presented at a May 21 meeting of the university's Board of Regents, cited the combination of Bridgewater's Pure Alpha strategy with “a broadly diversified portfolio of long market exposures to produce high risk-adjusted returns that have limited correlation to most other asset classes.”

The $132 billion Teacher Retirement System of Texas, Austin, was an early “launch investor,” allocating $250 million to the Optimal Portfolio on Feb. 2, Juliana Fernandez Helton, a TRS spokeswoman, said in an e-mail.

Bridgewater's new portfolio started trading on Feb. 1 and by April 30, was managing $10 billion with additional clients queued up for investment, said a source with knowledge of the strategy who asked not to be identified.

As of April 30, the breakdown of Bridgewater's aggregate $170 billion under management was 47% each in the Pure Alpha and All-Weather strategies and 6% in the Optimal Portfolio.

About half of the assets in the Optimal Portfolio strategy are new allocations from current investors and the balance is from conversions from Bridgewater's All-Weather strategy, said the source.

The Pennsylvania Public School fund, for example, moved $600 million to the Optimal Portfolio from its $1.8 billion investment in Bridgewater's All-Weather risk-parity strategy because Bridgewater engineered the new portfolio “as a way to reduce the systemic market risks” within the older strategy, Ms. Oh said in her report.

The Optimal strategy is expected to reduce the total risk of the pension fund's portfolio as well as that of the risk-parity allocation that could result from “a rapid rise in interest rates or a decline in equity markets,” Ms. Oh said in the report.

University of Michigan, Texas Teachers and Pennsylvania Public Schools all are long-time Bridgewater clients.

University of Michigan has been a Bridgewater investor since 1994, but does not disclose the size of individual manager allocations, said Rafael E. Castillo, director of risk management, in an interview.

In addition to the $600 million invested in Optimal and the $1.2 billion in All-Weather, the Pennsylvania Public School fund has $1 billion invested in pure alpha and $1.9 billion in Bridgewater's Treasury inflation-protected securities portfolio.

Besides Texas Teachers' investment in Optimal, an additional $1.1 billion was allocated to three of the firm's other strategies: All Weather II, $870 million; Bridgewater Pure Alpha, $137 million; and Pure Alpha Major Markets, $69 million.

What's more, the pension fund also is a part owner of the company. In 2012, Texas TRS bought an ownership stake in Bridgewater for $250 million.

Some investors, like the $4.4 billion Ventura County (Calif.) Employees' Retirement Association, will position the strategy a little differently in their portfolios, if the recommended investment is approved.

Ventura County is considering a $130 million investment in the Optimal Portfolio as part of a new $435 million global tactical asset allocation investment. The county retirement plan already has invested $286 million in Bridgewater's All-Weather strategy.

Prior investment with Bridgewater and the fact that the Optimal Portfolio is “based on the same investment principles, people and processes applied to All-Weather and Pure Alpha,” as Pennsylvania Public School's Ms. Oh wrote in her report, gives investors confidence to invest in the brand-new strategy with a very short — three-month — live track record.

“Bridgewater has adopted a one-team approach and there is no segregation by product. In other words, OP was designed and is managed by the same investment team that manages AW and PA,” agree the fund's consultants, Satya Kumar and Claire Shaughnessy, both partners of Aon Hewitt Investment Consulting, based in Norwalk, Conn., in a report to Pennsylvania Public School trustees.

The Optimal Portfolio strategy returned 1.9% in the three-month period ended April 30, but Bridgewater has calculated simulated returns for the portfolio back to February 1970, according to performance reports obtained by Pensions & Investments. Those simulated annualized net returns were: one year, 5.5%; three years, 7.1%; five years, 8.8%; and 10 years, 9.5%.

Even as their clients are willing to make large investments, consultants still are wary of Optimal's short returns history.

In a report to Ventura County's trustees for their May 18 meeting, for example, NEPC LLC, Boston, said it maintains a neutral rating for the Optimal Portfolio “largely due to the lack of a live track record,” even though the consulting firm has given the All-Weather and Pure Alpha strategies preferred ratings.

“The concept of the Optimal Portfolio is intuitively appealing as the benefits of combining negatively correlated or uncorrelated alpha positions with a strategic beta allocation are undeniable,” NEPC's report continued.

“However, we believe it is prudent to assess ... this approach by verifying it through live performance and validating Bridgewater's ability to effectively blend these two return streams as (its) philosophy historically has been quite strident in preserving the distinct separation of alpha and betas.”