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Ray Dalio Bridgewater bets $1bn on a big market drop … WSJ

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World’s largest hedge fund using options to wager that either S&P 500, Euro Stoxx 50 — or both — fall by March

By Juliet Chung and Gunjan Banerji

Bridgewater Associates has bet more than $1bn that stock markets around the world will fall by March, said people familiar with the matter.

The wager, assembled over a span of months and executed by a handful of Wall Street firms, including Goldman Sachs and Morgan Stanley, would pay off for the world’s biggest hedge fund if either the S&P 500 or the Euro Stoxx 50 — or both — declines, some of the people said.

It is made up of put options, which are contracts that give investors the right to sell stocks at a specific price, known as a strike, by a certain date. They allow investors to shell out a relatively small amount of cash to hedge a larger portfolio or make a directional wager. The options expire in March and currently represent one of the largest bearish bets against the market.

Bridgewater paid roughly $1.5bn for the options contracts, or just about 1% of the Westport, Connecticut, firm’s $150bn in assets under management, according to people familiar with the matter.

The options contracts are tied to around $100bn worth of the indices, said people familiar with the matter. How much the firm stands to potentially make would depend on many factors, including the magnitude of any market decline and the timing of when the firm cashes in its bet.

It couldn’t be determined why Bridgewater made the investment. Several clients said it may simply be a hedge for significant exposure to equity markets the firm has built up. Funds often hedge, or take offsetting positions, against other exposure to protect against losses.

The massive size of the wager has prompted chatter among traders and caused the price of some options to rise.

There has been a surge in put options outstanding tied to the S&P 500 index. The number of S&P 500 put options outstanding hit the highest level in more than four years in September, according to data provider Trade Alert. There has also been growing interest in S&P 500 put options expiring in March, the data show.

The bet is one of a growing number of bearish trades that have been placed as stock markets reach new highs and as some investors worry about a correction. Some prominent money managers have also predicted that markets would fall if Senator Elizabeth Warren wins the Democratic Party nomination, or the presidency; traders have started to place bearish wagers in sectors including health care.

Bridgewater declined to comment on its trades in a statement, adding: “We have no positions that are intended to either hedge or bet on any potential political developments in the US.” Bridgewater also said that its positions change often and are frequently hedges for others and that reading too much into a single position “would be a mistake”.

Bridgewater’s bet is made up of a series of put contracts, said people familiar with the matter. The stock indices wouldn’t have to fall to the contracts’ strike prices for Bridgewater to profit. Rather, Bridgewater could turn around and sell contracts that rise in value if markets start falling, even if the declines leave indices short of the strike prices.

Most contracts aren’t exercised at their designated strike prices, but instead are commonly used as trading instruments for investors looking to profit from the market’s moves. Options prices typically rise as the underlying instrument gets closer to the strike price and as it appears more likely the instrument could hit that level by the expiration date.

Bridgewater’s counterparties could theoretically be on the hook should its wager pay off. A standard practice among Wall Street counterparties is to turn around and hedge the risk they have assumed.

Some investors have been unnerved by the near relentless march upward of the S&P 500 since March 2009 — the longest bull run in the index’s more-than-90-year history. The index has hit 23 highs in 2019, in a year when hopes for lower interest rates and for a resolution to the trade dispute between the US and China have continued to propel stocks.

March 2020 is significant in the Democratic primary because a majority of the party’s delegates, which are needed to capture a presidential nomination, will have been awarded by the end of the month.

Investors including Stanley Druckenmiller and Leon Cooperman have said in recent months a Warren presidency would cause markets to fall. Some traders say companies are likely to hold off on major spending decisions until it becomes clearer whether she’ll win.

Wall Street has begun offering analyses of what a President Warren could achieve by executive power and suggesting ways investors could trade a Warren candidacy. Morgan Stanley on October 1 sent trading clients an “Elizabeth Warren Risk Basket” it described as a way to hedge the risk associated with her myriad plans. The basket and its ticker — MSXXWARR — were renamed later that day.

A person close to Morgan Stanley said the basket was meant to reflect the progressive agenda and was broader than any one candidate. Other big banks also have created baskets of stocks tied to Democratic presidential candidates’ policies.

The Warren campaign didn’t respond to requests for comment.

Key Square Capital Management, a $4.5bn macro hedge fund founded by Scott Bessent, a former investment chief for George Soros, is betting against the dollar in a variety of currencies anticipating Warren’s continued strength, according to people familiar with the matter.

Key Square said in a November 14 letter to investors that “intelligent people can argue whether Warren’s numerous programs will be good or bad for American society, but they are unequivocally negative for US asset prices.”

There also have been bearish trades on one of the biggest exchange-traded funds tracking health care, the $18.5bn Health Care Select Sector SPDR Fund, which holds shares of pharmaceutical companies and health-care providers, analysts said. Warren and Bernie Sanders, another leading Democratic presidential nominee, have called for banning private health insurance and negotiating down drug prices.

Trying to time the markets or bet on political outcomes can be treacherous. Soros, a major Democratic donor, lost nearly $1bn in the immediate months following Donald Trump’s unexpected election when the stock market rallied. Even spending money on simple hedges in recent years has often been a money loser as major US indices have ascended.

Bridgewater’s unorthodox management culture of “radical transparency,” which includes taping and posting most internal meetings for all employees to see, has made it one of the few hedge funds to fascinate both on and off Wall Street. Its founder, 70-year-old Ray Dalio, has laid out that philosophy in a book he has promoted as a management manifesto for companies, despite high-profile shake-ups in Bridgewater’s own leadership ranks in recent years.

Dalio, who has called for higher taxes on the wealthy and signed the Giving Pledge — a campaign started by Bill Gates and Warren Buffett to get the wealthy to promise to give away most of their wealth, has warned recently that rising populism around the world and extreme levels of inequality can cause conflicts. “Capitalism needs to be reformed. It doesn’t need to be abandoned,” Dalio said in an episode of “60 Minutes” earlier this year.

Credited with forecasting the financial crisis, Bridgewater made 8.7% in 2008 in its flagship Pure Alpha fund, then made a major shift into bonds that drove a 27.4% gain in 2010.

This year, the macro fund has lost 2.7% through October. Another fund it manages, All Weather, is up 14.5% for the period. Bridgewater typically makes many small bets across a broad array of instruments.

#Ray Dalio Bridgewater bets $1bn on a big market drop … WSJ November 22, 2019 at 03:03PM

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