Monday, July 29, 2019

Has Dalio Lost His Edge?

I find myself thinking a lot lately about something I gleaned from an interview that took place a few years ago with a prominent hedge fund manager (Colm O'shea). He said that as bull markets near their tops, the smart money managers lose assets (clients), while the perpetual bulls collect the last of the spoils (gain assets/clients).


Reason being, per O'shea, the smart money does the work, puts in the hours, formulates hypotheses and ultimately identifies the seeds of a bull market's destruction long before they're even remotely discounted by stock prices. Hence, they begin getting defensive while stock prices continue to melt higher; their relative returns therefore suffer toward the end while the forever-bulls -- oblivious to the subtle, yet growing, stressors -- are still knocking it out of the park!

Of course the story will end with the bulls (and their clients) blindsided by a bear market while claiming that nobody could've seen it coming. Well, as I'm suggesting, some indeed will see it coming, and they're the ones (the ones willing to accept new business, that is) who will be managing the assets that stampeded away from the bulls as the bear market deepens.

Ray Dalio is a modern-day legend; and boy does he deserve his reputation! Now managing the largest hedge fund on Earth, he has produced more dollar gains for investors than any manager in history. His firm's flagship fund "Pure Alpha" actually produced a 9% gain during the bear market of 2008, and a whopping 23% during 2011, a year that saw your average hedge fund down 5%.

Lo and behold, I read last week that during the first half of this year -- one of the best first-halfs on record -- Dalio's fund actually lost 4.9%!

So what gives? I thought he was the best! Has he lost his edge? Well, if you've been with me herein the past few months, you know that -- while we've nonetheless captured the lion's share of this year's gains for our investors -- I'm seeing below-the-surface developments (stressors) that have me more guarded than I've been throughout this entire expansion. Clearly, Dalio does as well.

So, no, I don't believe for a minute that Dalio has lost his edge; he's simply following O'shea's script; he's doing the work and is not presently liking what he's seeing, and, therefore, he's positioning accordingly. And, of course, as (or if) the market continues to melt higher, he'll -- much like Warren Buffett near the end of the tech bubble -- hear a growing chorus of bulls singing that he's lost his edge; that it's a new world and that old thinking simply won't get it done.

Well, just like Buffett, I strongly suspect that Dalio will emerge from the present episode even more of a giant (if that's possible) than he was going in.

Watch your inbox (or scroll back for the past couple of weeks) for an important message from me titled "Options Hedge".

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