World’s largest hedge fund bets market will crash

Bridgewater Associates, the world’s largest hedge fund, appears to be placing a $1.5 billion bet that stock markets will plunge — and that the crash will happen before the end of March.

The bet, or hedge, has been made over the past few months and is focused on a drop in the S&P 500-stock index of the largest U.S.-based companies. Bridgewater’s hedge could also pay off if European stocks crash and the U.S. market simply doesn’t rise during the next four months, according to the Wall Street Journal. 

Veteran stock market watchers say this particular Bridgewater bet may signal that one of Wall Street’s most sophisticated traders is skeptical that the U.S. and China may be able to reach a trade deal. 

Ray Dalio, the hedge fund’s colorful founder, has in the past few years become one of Wall Street’s top experts on China, cultivating sources high up in the Chinese government, according to Dalio’s writings. Bridgewater could be betting that what has so far been mild worries about what a continued trade war between the U.S. and China could do to the global economy could turn into a full blown panic over the next few months.

Bridgewater, which on its website says one of the core principals of the firm is to “require its people to be open,” declined to comment to CBS MoneyWatch. The hedge fund told the Wall Street Journal that it was not betting on a particular outcome in the U.S. election next year. Another top hedge fund manager, Paul Tudor Jones, recently predicted at a hedge fund conference that the market would plunge 25% if Elizabeth Warren was elected president. Dalio was on stage at the conference at the same time Jones made the comment.

Ray Dalio says wealth inequality is a national emergency

Dalio, though, has bungled his own presidential stock market calls. On the eve of the 2016 election, Dalio said that he thought the market would crash if Donald Trump was elected president. Instead the market quickly rose, and is now 50% higher than it was in November 2016.

Bridgewater was one of the first hedge funds to draw a large portion of its investors not from just rich people but also from pension funds and other large institutional investors. It helped popularize a particular type of hedge fund strategy called risk-parity trading, in which hedge funds try to diversify their assets based on volatility risks, rather than geographic risks or asset-type risks like too much money in stocks vs. not enough money in bonds. 

Bridgewater now manages $150 billion. About half of that money is in it’s All Weather Strategy risk-parity fund. Recently, risk-parity funds have been blamed for causing larger swings in the stock market with their computer-trading-assisted selloffs.

It is not uncommon for a hedge fund to place some bets that would rise in value if the stock market fell. Most hedge funds, as the name suggests, make these bets even if they think the market in general will rise. 

Still, the Bridgewater bet is larger than usual. And the fact that U.S. or Europe markets would need to crash by the end of March to pay off is unusual as well. Both of those factors, along with Dalio’s China expertise, is what is drawing attention to the bet.