One “Principle” and two investment strategies. Aside from the most prominent label of Bridgewater Associate (LP.) (hereinafter referred to as “Bridgewater”), the story of the world’s largest hedge fund Bridgewater in China is far more than that For these.
More than 30 years ago, Rui Dalio, the founder of Bridgewater, witnessed the early creation of China’s capital market. In the late 1980s, Dalio came to China to get to know the major participants in the early stage of China’s capital market establishment, such as Gao Xiqing and Wang Boming, and provided assistance. Today, the Beijing Stock Exchange (hereinafter referred to as the “Beijing Stock Exchange”) has opened. Dalio said: “We have seen remarkable changes. Small and medium-sized enterprises have become partners of investors and funds. Connecting small and medium-sized enterprises is a very important progress.”
In 2011, Bridgewater, which successfully predicted the financial crisis and was sought after by the market, set up a representative office in China. Under the background of accelerating the opening of China’s capital market, it officially registered private equity products in 2018. Introducing a complete investment system into China, Bridgewater, which serves global sovereign wealth funds, pension funds and other institutions, began to manage assets for Chinese clients.
Although facing a different regulatory environment, Qiaoshui is well prepared for long-term development in China, but more importantly for Dalio is that his family’s philanthropy in China has persisted for more than 20 years.
In 1995, Dalio’s third son Mai Xiu-then only 11 years old-became the youngest foreign student in China. After returning to the United States after this learning experience, Mai Xiu decided to establish the China Care Fund for China. Charitable assistance to disabled orphans in remote areas has continued to this day.
Wang Yan, President of Bridgewater China, was also moved by this charity and joined Bridgewater in 2009. “Maybe the ancestors of Switzerland hundreds of years ago were close relatives of Marco Polo.”
Recently, Caijing magazine and the Chinese version of Barron Weekly interviewed Wang Yan to explore the growth and evolution of hedge fund giant Qiaoshui. , And what are the long-term layouts of the bridge water rooted in China.
Witness the growth of China’s capital market
”At present, we have seen very big changes. Investors and small and medium-sized enterprises can connect. This is a very important progress.” Ray Dalio responded to Wang Boming, editor-in-chief of Caijing magazine via video connection on October 23 On the issue of the Beijing Stock Exchange, said.
Just more than two months ago, Chinese executives announced the establishment of the Beijing Stock Exchange, which will shift the selection layer on the New Third Board to serve small and medium-sized enterprises. This is the third stock exchange in China. On November 15, the Beijing Stock Exchange officially opened.
Dalio has witnessed and participated in the initial stage of China’s capital market. In 1989, Dalio came to China. At that time, Wang Boming, Gao Xiqing and others were planning to establish China’s capital market and promote the establishment of China’s first stock exchange. They established the “China Securities Market Research and Design Center” (formerly known as the “Stock Exchange Research and Design Joint Office”. , Referred to as “Joint Office”).
This past episode is recorded in Dalio’s best-selling book “Principles.” In February 2018, the “Principles” was published in China, which summarized nearly 500 principles in Dalio’s work and life over the past 40 years. According to press data in the third quarter of 2021, the total sales volume of Principles in China has exceeded 2 million copies.
Wang Boming recalled the scene of his acquaintance with Dalio in the late 1980s when the “Principles” was published and listed in the West Building of the Chongwenmen Hotel in Beijing. That building was once used by hotel service staff and administrative staff. There were four huge trash cans downstairs, and Dalio saw a group of young people planning to establish a Chinese capital market with dreams, and decided to help. “The establishment of China’s capital market is due to Rui.” Wang Boming said.
From then on, Dalio began to carefully observe China’s reform and opening up, began to study the development of China’s financial market, and continued to participate in it as the Chinese market opened up, bringing leading research and investment methods to this early-stage market.
Today, Dalio has become one of the most well-known overseas investors among participants in the Chinese financial market. His Sina Weibo has nearly a million followers and maintains a daily update frequency of one principle. Chinese investors are more concerned about the observation, analysis and prediction of current hot issues by the head of a $160 billion hedge fund.
On October 23, Wang Boming asked about common prosperity. Dalio said that after studying the history of the past 500 years, it is found that if the gap between the rich and the poor is too large and the debt level is too high, it may cause a potential economic recession. In order to maintain economic development, a balance must be reached and there must be common prosperity. In order to achieve this goal, we must not just transfer wealth from one person to another, but provide opportunities and productivity to maintain long-term balance. “China has announced that it will move towards common prosperity. The establishment of the Beijing Stock Exchange for SMEs to list reflects China’s desire to achieve this balance.”
Dalio mentioned China’s real estate market. “China has issued three red lines in response to the real estate bubble. It is very wise. It has established the bottom line and standards for financial conservative policies, which has had an impact on the Chinese real estate industry. In my opinion, this is a very normal and healthy transformation. “Dalio said in a connection on October 23.
Not long ago, China Evergrande, a private real estate developer, fell into a debt crisis. The sharp fluctuations in dollar bond prices caused market concerns. Dalio gave his own judgment in an interview with Bloomberg for the first time: “The situation is completely controllable.”
For the Chinese market Dalio said that the Chinese market’s cash savings or real estate may have accumulated too much capital. The stock market is relatively volatile, and investors need to balance their assets well. “From the overall situation, we still do not recommend that you invest in these cash-based assets. The excessive supply of cash will also cause market volatility.”
As for the Fed’s tightening rhythm, which is most concerned about the global market, Dalio believes that it is We are facing a dilemma. “We are facing a situation like stagflation in the 1970s. On the one hand, we cannot keep printing money. On the other hand, there is a serious debt risk. The tightening will lead to an economic downturn. If the Fed makes a mistake, it is best not to tighten too much. aspects. ” ”
do not always think of what the Fed said, you will see that in the near future, people will stare ask China’s central bank governor said what. “years ago Da Liou has in-house research Said at the meeting.
This passage comes from the review postscript written by Wang Yan in the book “Principles”. He joined Qiaoshui in 2009 and previously served as the president of Wellington Asset Management in China.
Discover the “Holy Grail of Investment”
As one of the most well-known overseas investors of Chinese investors, Dalio is even more curious about how he started from nothing, from a child of an ordinary middle-class family on Long Island, into “the best-performing hedge fund ever.” manager”.
Dalio was 12 years old when he started investing. The first investment was invested in Northeast Airlines. In 1975, he founded Bridgewater in New York, initially providing consulting and risk management services to corporate clients. In 1987, Qiaoshui obtained the right to manage a USD 5 million bond account of the World Bank and formally transitioned to a hedge fund for asset management.
Currently, Bridgewater manages more than 160 billion US dollars in funds and serves approximately 320 customers. “Our clients include government sovereign wealth funds, central banks, pension funds, university endowments, charitable funds, insurance companies, etc.” Wang Yan emphasized, “We manage money for institutional investors.”
Bridgewater Fund is an investor. It mainly provides three products: Pure Alpha (Pure Alpha) funds, all-weather (All Weather) strategic funds and “Optimal Portfolio” (Optimal Portfolio) strategic funds that combine the first two strategies.
Wang Yan explained that the return of all funds is nothing more than three parts: market return (beta, beta) from exposure to market risk, active return (alpha, alpha) from investment manager skills (skill), and risk-free rate of return. (Cash, cash). In traditional investment methods, the market returns and active returns of a fund are usually mixed together to separate the returns of alpha and beta. Bridgewater is the pioneer in this regard.
Based on this innovative concept, Bridgewater established its first flagship fund in 1991-the active “Pure Alpha” fund. This fund performed particularly well during the market decline from 2000 to 2003. In 2006, the fund was closed to new investors when it reached a predetermined maximum funding level. In 2008, in the context of the global financial crisis, the fund’s return was as high as 12%.
”I found that if I have 15-20 good, uncorrelated return streams, I can greatly reduce my risk without reducing my expected return.” Dalio wrote in the book “Principles” This method is described as the “Holy Grail of Investment.”
If “Pure Alpha” is an optimal alpha fund, then Bridgewater’s second flagship fund launched in 1996-the all-weather strategy-is an optimal beta fund. It represents a sufficiently balanced portfolio of assets that can be applied to all market environments, have good long-term performance, and will not suffer unacceptable losses.
Dalio envisioned four different macroeconomic environments (increased growth rate plus increased inflation, increased growth rate plus decreased inflation rate, decreased growth rate plus increased inflation, decreased growth rate plus decreased inflation rate) and four different investment strategies , And combine them to build an asset portfolio to control fluctuations and losses. This innovative concept from 0 to 1 is now called “risk parity” by the industry, and it was discovered when Dalio tried to design a risk-neutral family trust for his family.
The all-weather strategy has been questioned since its inception. This suspicion didn’t disappear until the financial crisis in 2008: it has withstood the test of the market all-weather. In 2007, “Barron’s Weekly” stated in an article: “No one is more prepared for the global market crash than the customers and subscribers of “Daily Observation” published by Bridgewater.” Bridgewater “from the spring of 2007 At the outset, a strong warning was issued for the danger of excessive financial leverage.”
Wang Yan said that Bridgewater’s long-term victory over the market relies on three system processes: fundamentals (understanding the causal relationship among macro-market drivers and summarizing them into universal principles), systematization (translating these principles into trading rules and Signals, conduct stress testing and continuous improvement), decentralization (balance allocation risk between decentralized good return streams).
Figure 1: Qiaoshui’s all-weather strategy
Source: Qiaoshui official website. Drawing: Zhang Ling
”We are like a machine, but it is not a quantitative transaction. We use systems, logic, and common sense. We also use machines to identify, measure, track, feedback, and stress tests. After the fundamentals and systematization are completed, we also There is no guarantee that you are 100% correct. The next step is to greatly diversify in all tradable and liquid markets, so that the correlation between them is as low as possible.” Wang Yan further explained.
Even so, investment is never something that makes a profit without losing money. According to data from LCH Investment Company, in 2020, a fund managed by Bridgewater reached 14% in the first quarter, but it was flat again by the end of the year.
In response to doubts about Qiaoshui’s 2020 performance, Wang Yan said: “No one is a winning general. If a fund makes money every year, it is very likely Madoff’s Ponzi scheme. This happened several times in Qiaoshui’s history. In the second and third years, they made it back. In fact, the pure Alpha fund with a larger drawdown last year still has a 16% return all-weather.”
Wang Yan believes that judging a good fund requires Look at three points: first, is it systematized; second, can it be corrected quickly after an error occurs; third, the loss is due to a turning point in the market or one’s own mistakes.
LCH Chairman Rick Sopher commented: “The conditions (in 2020) are good for people rather than machines.” Nonetheless, according to the statistics of LCH in January this year, Bridgewater’s net income since its establishment was 465. For billions of dollars, Dalio is still the most profitable hedge fund manager of all time.
Like any organization, the key to Bridgewater’s success is people and culture. A 2011 article in New York magazine described the company as the “largest and undisputed strangest hedge fund” because of its unwavering commitment to “complete honesty and transparency” and its presence in the corporate culture Refine the details.
Wang Yan, who has joined Qiaoshui for 12 years, summed up the philosophy and culture of the world’s largest hedge fund: extreme transparency, extreme pursuit of truth, relationship equality, and the use of mistakes as a tool for reflection.
”When we discuss issues in the company, they are all audio and video recordings, which are broadcast throughout the company, unless privacy is involved. This is also a very extreme example in American companies.” Wang Yan said, “and we regard making mistakes as a good thing. Just reflect on it and record it.”
Dalio mentioned in his book “Principles” that he had “the worst loss in life” from 1981 to 1982. It was this “extremely humiliating” misprediction of the economic trend that made him determined to build Qiaoshui into “a creative organization that selects the best.” “It is not an autocratic institution, led by me, and others will follow; nor is it a democratic institution, where everyone has equal voting rights; it is a creative institution that encourages deliberate and deliberate disagreements, based on the relative differences of different people. Strengths analyze and weigh their opinions.”
The Chinese Long March
After that is the story that the public is more familiar with. Because of foreseeing the 2008 financial crisis and achieving good returns, Qiaoshui and Dalio began to receive media attention since then, and the outside world began to speculate about Qiaoshui and Dalio. So in 2010, Dalio decided to put himself The work manual is made public, and the “principles” are put on the website for people outside of Qiaoshui to read for free.
In 2018, the simplified Chinese version of the “Principles” was published. Wang Yan wrote in his review postscript: “Swiss’ new Long March in China has begun.” It was
also in this year that China’s capital market opening process continued to accelerate, and Qiaoshui ( China) Investment Management Co., Ltd. completed the registration of private equity investment fund managers with the China Association of Fund Industry Private equity products have taken the first step to enter the Chinese market.
Recalling joining Qiaoshui, Wang Yan mentioned, “He Rui was an old friend before. He invited him many times, but in the end it was Rui’s third son Mai Xiu who attracted me. He did the China Care Fund after returning from China. , I have helped many disabled orphans. It is amazing and I am very touched.”
Mai Xiu founded the China Care Fund because of a very risky decision made by the Dalios when he was 11 years old. In 1995, Dalio sent Mai Xiu, who could not speak Chinese at all, to Beijing Shijia Hutong Primary School. As the youngest foreign student in China at the time, Mai Xiu was alone in the house of his friend Gu Aunt Gu, who was fostered in Switzerland, and Aunt Gu’s wife used a bicycle to transport Mai Xiu to elementary school.
In 1996, Mai Xiu ended his studies in China and returned to China. This experience had a profound impact on him and prompted Mai Xiu, who was still a middle school student, to establish the China Care Fund in 2000. This foundation has been in operation until now, and every summer in the past few years, Dalio would hold a charity party donating to the China Care Foundation in the small American town where he lives.
”This is a very special story. What is the most touching thing to me? It is through the process of their children doing charity funds that they gathered a lot of people and became interested in China, hoping to learn about China.” Wang Yan said. The reason why he is very familiar with the story of the Dalio family is because his sister was an employee of the China Care Foundation in Beijing. She once went to an orphanage in Shaanxi with Rui and Mai Xiu. She said that Rui carried a large pack of baby diapers in her left hand and milk powder on her right shoulder, and drove with them, just like migrant workers.
Dalio dared to send such a young child to China alone as an international student because he had his first trip to China as early as 1984, and he has become attached to China ever since. Wang Yan said that since China started to create the capital market in 1989, Dalio has visited China almost every year, and he would often invite old friends from the “Joint Office” he knew back then to drink Moutai, such as Gao Xiqing, Wang Li, and Wang Boming. , Wang Jianxi, Ouyang Qian, etc.
In fact, Qiaoshui was only a small company in the late 1980s. According to Dalio’s “Principles”, there were only 24 people at that time. At that time, China had not yet opened its doors. Wang Yan joked: “Rui is an authentic American, but a few generations back it should be a northern Italian from the Venice area. Maybe his ancestors were close relatives with Marco Polo hundreds of years ago, or he himself said that It is not clear why he is so interested in China.”
Figure 2: The development history of Qiaoshui in China
Source: Qiaoshui official website
Qiaoshui began to help Chinese institutional clients manage money in 1993. In 2011, it formally established a representative office in Beijing. In 2016, a wholly-owned subsidiary was established in Shanghai. Today, Bridgewater has registered two private equity products in China, and overseas products worth more than 10 billion yuan have been invested in the Chinese market.
”Because Switzerland has a special liking for China, we have also done a lot of investment knowledge transfer, such as our all-weather strategy.” Wang Yan said, “For example, before the Chinese market only had gasoline and diesel cars, we brought electric cars in. ”
one afternoon in October, Wang along on a whiteboard Bridgewater Beijing office once again skillfully depicts the concept of all-weather classic four grids.
The all-weather strategy has brought long-term and stable investment returns to Qiaoshui. Can it be achieved in China? “Test and real data show that it can be achieved.” Wang Yan gave a positive answer, “Before entering the Chinese market, we did 18 years of historical backtesting and stress testing. The expected Sharpe ratio is 0.7-0.8. After running for three years, we found that the Sharpe ratio exceeded 1. ”
This all-weather enhanced product released in China is actually a combination of 70% beta and 30% alpha. Wang Yan introduced: “70% of domestic products are beta, plus our proactive macro view. In the long run, we hope to achieve similar returns to stocks, but the risk is only half.”
Like Qiaoshui, overseas investment management giants Together they are aiming at China’s huge wealth management market. At present, BlackRock and Fidelity have taken the lead in obtaining public offering licenses. However, due to differences in regulatory rules and environments, foreign asset management institutions still have a long-term process of exploration.
Witnessing and participating in the opening of China’s capital market, Wang Yan said: “The degree of market opening has greatly exceeded expectations. However, future rules still need to be fine-tuned to integrate with mature markets.”
Talking about future plans, Wang Yan said frankly: “From 2016 Begin to advance and build a team. Under current conditions, it is still exploring how to manage assets for institutional customers.”
Qiaoshui’s products in China have been running for three years, and the performance has exceeded Wang Yan’s expectations, but there are obvious differences in customers. Overseas long-term Facing institutional customers, in China, it is facing qualified investors.
When he introduced Bridgewater’s products, he would raise a few simple questions: “The world’s proven best investors over the age of 80 must include Buffett, Munger, and Soros. If you can invest with them, would you? Willing to invest? Rui’s strategy has been tested and iterated for decades, and the pure alpha strategy has not lost money every year from 2001 to 2018.”