Bridgewater has a plan for steering through storm

Bridgewater Associates LLC, the world's largest hedge fund manager, is experiencing one of its hardest years after assets under management fell precipitously.

Its flagship global macro strategy — Pure Alpha — was down 20% in the first quarter this year in response to the impacts of the COVID-19 pandemic on global markets.

Bridgewater's total assets under management fell 12.5% to $140 billion through June 30 from $160 billion as of Dec. 31. After better performance in July and August, total AUM rose to $148 billion as of Sept. 1, down 5.7% from year-end 2019, data from Bridgewater showed.

"Bridgewater has gray clouds hanging over it right now with a lot of challenges ahead including performance issues, AUM decline, employee layoffs and persistent negative press," said Michael S. Falk, a partner at manager advisory firm Focus Consulting Group Inc., Long Grove, Ill.

Mr. Falk was referring to two high-profile lawsuits regarding former employees that Bridgewater has been involved in this year.

"Bridgewater likely will lose a fair amount of assets until a strong comeback happens, but when you have more than $100 billion of AUM, you do have a strong leg to stand on," Mr. Falk added.

However, Bridgewater has a plan.

The firm is 18 months into a restructuring exercise that will not only reduce the size of its client base to enable it to form closer strategic partnerships with some of the world's largest investors, especially with non-U.S. sovereign wealth funds, but also decrease its headcount, said Kyle Delaney, chief commercial officer of the Westport, Conn.-based firm.

To date, the client base has been reduced to about 300 from 350 and an unknown number of employees were laid off, according to information reported by Bloomberg.

"We want to create partnerships with these megafunds to help them deal with their thorniest issues," Mr. Delaney said.

In order to do so, Bridgewater has reserved the analytical and portfolio advisory services that previously were offered to its entire client base for its large strategic partnerships.

By way of replacement for advice and investment counsel from Bridgewater employees, Mr. Delaney said Bridgewater has spent "tens of millions" in building out its technology capability to handle a new push to provide more digital engagement and portfolio management tools to smaller investors as well as to investment consultants.

Mr. Delaney said "we would never ask a client to leave" but he acknowledged that some current investors may choose to do so.

"We have told smaller clients about this new approach. The conversations haven't been about leaving, but rather telling them that we can't do as much for them regarding advice as we could in the past."

Given the high degree of consultation on portfolio and market issues that Bridgewater employees traditionally provided to all of the firm's clients, smaller clients may reconsider their now digitally focused relationship with the firm.

An investment consultant who asked for anonymity said, "we have a client who is very reliant on Bridgewater for advice and counsel and is close to the firm because of this. Bridgewater is the best at catering to its clients. It's one of the reasons clients likely stayed with the firm even when the performance of Pure Alpha is down 20% in the first quarter," the source said.

That said, not all institutional investors have kept the faith.

Analysis of hires and terminations from P&I's reporting over the past 11 years showed an elevated level of redemptions in 2020 through Sept. 15.

Four large U.S. public pension funds withdrew a total of $1.3 billion from Bridgewater hedge funds and risk-parity funds, P&I data showed. About $270 million was from two terminations of Pure Alpha strategies with the balance taken from Bridgewater's risk-parity strategies.

P&I data showed seldom Bridgewater redemptions between 2010 and 2019.

Assets managed in the Pure Alpha strategy were down $3.5 billion year-to-date through Aug. 31, mostly from performance losses, Mr. Delaney said.

Pure Alpha II returns were flat in 2019, down 20% in the first quarter and up 3% in the second quarter, according to an anonymous industry source. In contrast, the return of Hedge Fund Research Inc.'s HFRI Macro: Systematic Diversified index was down 0.5% in the first quarter, down 2.4% in the second quarter and up 7.1% in 2019.

Bridgewater's Pure Alpha hedge fund strategy was closed to new investment before March but after some investors took redemptions, the fund was reopened to new investors or existing clients seeking to add to a current investment. The strategy remains open to new investment, Mr. Delaney said.

As of June 30, Bridgewater's hedge fund assets totaled $98.9 billion, down 25.1% from the same date a year earlier, according to data provided by the firm for Pensions & Investments' 11th annual hedge fund special report.

Bridgewater said hedge fund assets rose to $104 billion as of Sept. 1.

Greg Jensen, one of the firm's three co-CIOs, said during an interview in early September that Bridgewater is focused on improving the returns of its portfolios, stressing that "our key in both alpha (Pure Alpha) and beta (All Weather) strategies is to get the right balance of diversification."

During an interview in April, Mr. Jensen said that in retrospect, the investment team for the Pure Alpha hedge fund strategy should have changed the global macro fund's systematic process in response to the COVID-19 impact on markets despite historical stress tests that suggested it was better to have stuck with the then-existing approach.

"The virus and associated lockdowns affected economic linkages in a way that required significant changes to our process. As the lockdowns ease, the major differences will be driven by fiscal and monetary policy choices of different countries that are in our wheelhouse," Mr. Jensen said.

He said given the fact that nominal bonds offer little diversification and "can't produce returns anymore," primary sources of return in the firm's All Weather risk-parity strategy now are inflation-linked bonds, gold and equities.

Pure Alpha currently has a diversified portfolio of positions across developed currencies, emerging currencies, inflation-linked bonds and equities as well as gold and other commodities, the firm said.

Mr. Jensen stressed that the Pure Alpha strategy doesn't make "big bets. We invest in increments. We aren't trying to hit high performance from equities. Rather we expect very normal returns from a diversified portfolio of equities."

Some investment consultants who spoke with P&I on the condition of anonymity were generally supportive of the firm's changes to its portfolios in response to unprecedented market conditions.

"I give kudos to Bridgewater for being the most thoughtful among managers, especially global macro managers, about how to deal with low-yield bonds," noting that most managers aren't trying to find appropriate replacements, said one investment consultant.

The source said Bridgewater's proactive stance likely is one of the reasons that Bridgewater hasn't experienced high redemption levels despite performance issues.

In contrast, the consultant quoted earlier said "everything Bridgewater is doing in response to this drawdown is reactionary. When clients ask why Bridgewater is adjusting the beta sources in All Weather, the response is 'because the market changed,' not because it was in anticipation of change. I don't think they're really changing much of anything."

By way of bringing new investors to its hedge fund and risk-parity strategies, Bridgewater is increasing the number of external distribution partners it works with in order to tap larger pools of institutional and wealth management investors run by these firms.

Mr. Delaney said instead of establishing a presence on the ground in various regions, Bridgewater opted to use a partnership model for distribution of its investment strategies. In particular, Bridgewater has its eye on Asian and Latin American markets.

Existing Bridgewater distribution partners include Lyxor Asset Management and Silver Creek Capital Management LLC, he said.

Regarding Bridgewater's previously announced staff reductions, the total number of employees who have or will be laid off remains to be determined, but the firm's intent is "to be smaller and leaner than in years past," according to a statement provided by the company on Sept. 16.

Bridgewater did not provide a timeline for employee layoffs and said annual attrition likely will be a bit higher high in 2020 than in a typical year and the number of replacements hired likely will be smaller.

Bloomberg contributed to this story.