Bridgewater

®

Daily Observations
March 18, 2020
(203) 226-3030

©2020 Bridgewater Associates, LP

Ray Dalio

Our Performance
As you know, we have two types of funds—one that is our best strategic asset allocation mix (i.e., our beta funds,
which we call our All Weather funds) and the other that has our best alpha positions (which we call our Pure Alpha
funds)—and these funds operate at different levels of expected risk and returns and are sometimes combined to
make hybrid funds.
The net performances of these funds this year has been about as follows:
All Weather (10% vol) is down about 12%.
All Weather (12% vol) is down about 14%.
All Weather China RMB is down about 9%.
Pure Alpha (12% vol) is down about 14%.
Pure Alpha (18% vol) is down about 21%.
Pure Alpha Major Markets (14% vol) is down about 7%.
Pure Alpha Major Markets (21% vol) is down about 11%.
Optimal Portfolio (10% vol) is down about 18%.1
Don’t hold us to exactly these numbers because there’s nothing exact about them in this volatile environment.
What do I think about this performance? While it’s not what I would want, it’s consistent with what I would have
expected under the circumstances. The novel coronavirus is a pandemic that came on fast and hit us at the worst
possible moment because we had a long tilt in our positions. We had that long tilt because we were positioned to
take advantage of the liquidity in the financial/economic system, the levels of interest rates were low relative to
other assets’ expected returns, and there were no immediate signs of economic decline (though we did have
worries about what a downturn would be like because of the inabilities of central banks to be stimulative at the
same time as there were large wealth, political, and geopolitical gaps and conflicts).
We started tracking the coronavirus (and sharing what we were seeing in our Observations) in January. At the time
we discussed whether we should deviate from our stress-tested systems to override them based on what we were
seeing and decided not to because we believed that we shouldn’t. We made that decision because we knew we
didn’t have an edge trading based on our views of the virus and because the range of possible outcomes was so
huge. We also felt that this would be another one of a large number of other big unknown risks (e.g., threats of
wars with North Korea or Iran, an anti-capitalist getting elected in the US, a cyberattack, an earthquake, etc.) that
we had already engineered to handle via our normal risk controls. For those sorts of big potential risks or others
we can’t even imagine, we have controls that are intended to limit our losses to tolerable amounts.
In this case the risk control process worked as designed. As a result, our losses have been similar to those in our prior
worst-performing periods. In the past we have learned and recovered from these periods and expect that to be the case
again. For example, we are now delving deeply into the impacts of the virus by companies and sectors and how to
measure viruses emerging in various places so that we will be able to have an edge as the coronavirus wave passes from
place to place and if it or another virus comes back. That is how we learn and embed our learning into our system, which
never forgets and processes information much more quickly, accurately, and unemotionally than we can.
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Estimated through 3/16/2020. Past performance is not necessarily indicative of future results.

© 2020 Bridgewater® Associates, LP. By receiving or reviewing this Bridgewater® Daily Observations, you agree that this material is confidential intellectual
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Bridgewater® Daily Observations 3/18/2020

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Also, like in the past, we have maintained our liquidity to be able to adjust the portfolio in response to changing
conditions. While we lost money this time, we lost a tolerable amount of it so that we have the ability to come back from
it, and we remain liquid and can adjust our positions to still give you liquidity rather than prohibit you from getting it.
While this is a wild ride, please know that it isn’t our first rodeo. It is just another one of the many big shocks that
we have been through in our 45 years of having Bridgewater and my about 15 years before that as an amateur
investor. I/we have encountered many such moments, like the breakdown of the monetary system in 1971, the oil
shocks of 1971 and 1973, the breaking the back of inflation and the debt crisis of 1980-83, the bursting of the
dot-com bubble, the World Trade Center attack that knocked out government and private systems, and the 2008
financial crisis when liquidity seized up and credit risks were all over the place. We encountered all of these and
many more, plus we have studied and simulated our trading through many more cases extending back over the
last couple of hundred years and across many countries to come up with our timeless and universal rules.
Said differently, while we wish we didn’t have these losses, and while we aren’t used to pandemics and don’t claim
to know how to trade them, we view this situation as being like a number of other situations that have happened
to us before and that we had plans to deal with. For those who remember what a great year 2008 was for us
because we made a lot of money when most everyone else lost huge amounts of it, it is also worth remembering
that there were big performance bumps along the way during that year; as of September 2008, we were down
roughly 20% (in Pure Alpha 18%) from that year’s peak. By keeping losses within predefined limits, maintaining
liquidity, and measuring the impacts of events once they occurred, we were able to adapt our portfolios and
subsequently produce big up years in both 2010 and 2011.2
Over decades, we have developed our plans based on learning both through our real-world encounters with things
that we never anticipated before and through examinations of history. These encounters and examinations led us
to improve the rules in our systemized game plan. For example, eight years before the 2008 financial crisis our
study of the Great Depression led us to understand the mechanics of hitting 0% interest rates in an economic
downturn, which led us to build a “Depression Gauge” so that when rates hit 0% in 2008 we had it in our systems
and we stuck to it and it helped us a lot.
Similarly the game plan that we had going into this coronavirus crisis used indicators to trigger our defensive moves
in a downturn toward a 0% interest rate floor. It also included holding options positions designed to limit our losses
in the worst-case scenario regardless of the cause. Please keep in mind that the game plan is never supposed to be
something that we blindly follow when it doesn’t make sense to us; it’s meant to be consistent with what is sensible.
Of course we are questioning if we should have done some things differently; we are exploring this and will
systemize whatever we come up with into our decision-making systems.
Like all such past moments that had big impacts on us over the last 50 years or so, we are learning and improving
from this process. So all of my partners and I are deeply immersed in researching and developing indicators for
the things that took us by surprise so that as this event progresses or if an event like it re-emerges in the future we
will turn it to our advantage.
Going forward, the world has now crossed a very dangerous threshold for financial markets and economies that
poses great risks for all investors, which is the falling below 0% interest rates in an environment in which there is
an economic downturn, a global wealth gap, and populism. It is one we have been preparing for for a long time. I
will soon send you my research about this. We do think that we have an edge in knowing how to invest in this
environment. Right now we are deep at work, looking at the implications in detail.
I want to assure you that our most important fundamentals are good because we have a GREAT team of people
who are very smart and very committed to the mission of beating markets and helping each other and our clients.
Those are the most important fundamentals because they will determine our performance and our abilities to help
our clients in all ways possible.

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Past performance is not necessarily indicative of future results.

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Bridgewater® Daily Observations 3/18/2020