Bridge Over Troubled Water

Bridgewater fund beats market

Image source: Harry Murphy - Web Summit (Flickr); Yellow Cat, fotoslaz - Shutterstock

What's going on?

The world’s biggest hedge fund group, Bridgewater, said on Monday that its flagship fund delivered investors a 15% return in 2018 – a year where the US stock market returned a 4% loss (tweet this). Lay me down!

What does this mean?

Hedge funds aim to beat the market by both buying and “shorting” a variety of investments – including stocks, bonds, currencies, and commodities (anything from copper to soybeans). In late 2018, Bridgewater predicted that the US economy was cooling down and adjusted its investments accordingly – and it looks like that paid off.

Why should I care?

The bigger picture: No love lost for hedge funds in 2018.

Mega Swedish pension manager AP3 pulled some of its cash from hedge funds back in June, complaining of paltry returns. According to AP3, such funds only delivered an average annual return of 2% over the last 15 years – a mere 1% more than AP3 would have gotten from investing in much less risky US government bonds instead. Despite Bridgewater’s big win, it looks like AP3 made the right call: early data shows the average hedge fund lost 7% in 2018.

For markets: Glossy hedge growth may be down the road.

A hedge fund typically invests by taking a view on individual assets. It might, for instance, buy shares of Amazon – but not of the similar companies investors typically lump together with Amazon (its “index”). This selective strategy can let hedge funds win when the wider market tanks – if they pick the right assets, that is. By the same token, it’s tougher for hedge funds to make extraordinary gains when markets overall are rising and any old monkey can back a winner. Now, with the market’s halcyon days of mid-2018 but a distant memory, hedge funds might find it easier to generate value for their investors – and justify their high fees.

Originally posted as part of the Finimize daily email.

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