Bridgewater Associates founder Ray Dalio is known as one of the most successful quantitative hedge fund managers in history.

Ray Dalio Bridgewater

$3 trillion in assets against $10 trillion in liabilities

Dalio’s mathematical skills are on display as he shocks observers saying US pension funds don’t have the wherewithal to pay out benefits in coming years.  What was stunning was not Dalio believing the pension math was turning negative, as Detroit and Chicago examples are in front of our eyes.  What was stunning is that he said it in such plain talk and so bluntly in public.

According to a USA Today report, Dalio does the math – and its doesn’t add up, says the man who studies mathematical probability tables for a living.  Bridgewater deduces that 85% of public pension funds will go bankrupt in three decades, and they are projected to achieve 4% returns on their assets, or worse.

Simple math from Bridgewater founder

After conducting his quantitative version of a stress test, Dalio likely threw a little discretionary analysis into his thesis.  The economic environment will not always be positive, if history is any guide. Odds are that economic environments will shift, and with a taper undoing the needle in the stock market’s arms, he considered a variety of realities. Public pensions have obligations exceeding $10 trillion, yet only $3 trillion in assets to cover the coming expenses.  That is simple math.  Bridgewater, then, notes an investment return of nearly 9% a year is required to meet those onerous obligations.  They won’t get 9% in bonds – that could be a drain on assets if the coming rise in interest rates reduces the asset value of bonds.  Public pensions are looking at a 20% shortfall, Bridgewater claimed in the USA Today report.

Talking his book?

Quantitative traders are known to create mathematical formulas and then simulate their usage across a variety of market environments. Dalio is known as a master of recognizing the market environment and then creating “market neutral” funds, so his pitch here can be construed as both accurate and a move to utilize his funds.  It’s natural for a master trader to base their investment decisions based on their long term economic outlook. Is this talking his book?  Probably.  But like all good traders they believe in their positions and put their money behind their mouth.