Ray Dalio’s Bridgewater Associates has had an especially trying year as it targets ESG (environmental, social, and governance) issues through its investments. Through August, the $148 billion firm’s flagship Pure Alpha II fund is down 18.6% for the year—the worst loss in 10 years.
Q2 2020 hedge fund letters, conferences and more
Bridgewater advises investors to use ESG measures
According to Top 1000 Funds, at Sustainability Digital, Bridgewater's Karen Karniol-Tambour called on participants to put more of their capital toward investing in solutions that can make a difference in the world. She added that just a few years ago, that would've seemed "aspirational," but now it is "possible and achievable" for investors to think about impact in addition to returns and risk across all asset classes.
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Karniol-Tambour explained that investing with impact, return and risk in mind requires choosing assets with certain goals in mind. She said the Sustainable Development Goals are not only broad but also keep targets in mind. She added that investors should consider how each of the assets they are thinking about further the SDGs and select the assets that will have the greatest impact.
Karniol-Tambour also said the SDGs provide a basic map of where investors can look to go and enable them to connect their investments with their goals. She explained that assets which have an impact aren't very different from other assets that don't.
Did Bridgewater sacrifice returns for ESG?
It's unclear when Bridgewater made the change to focus on ESG, but Karniol-Tambour said investors don't have to sacrifice returns for ESG and can still have a balanced portfolio. This year's weak returns may cause some to question whether Bridgewater did indeed sacrifice returns for its ESG goals. However, several studies from other sources have found that it is possible to invest with ESG in mind without sacrificing returns.
As an example, Karniol-Tambour said investors might choose the goal to be a commitment to net zero. They would then build their portfolio and assess each investment against that goal. She believes the quality and availability of data will improve so that investors can move more and more into ESG.
Karniol-Tambour explained that Bridgewater's ESG dive brought them into looking at data from multiple research organizations. She said the data that is available made it hard to pick out black swans in ESG, and there is a wide range of outcomes. She added that it's a challenge not to be "over concentrated" on an outcome that never happens.
Problems at Bridgewater
Citing people familiar with Bridgewater's problems, Fortune reported on the firm's growing number of problems this year. Sources familiar with the issues said the firm's computer models misread the markets for the second consecutive year, and major clients started to redeem from the fund, pulling $3.5 billion net from it during the first seven months of the year.
Further, Dalio lost an arbitration against former staff members and is in a feud with his former co-CEO. He's also cut dozens of positions. Despite all the problems, Bridgewater remains confident about its positions and its ability to perform. A spokesperson for the firm told Fortune they have 45 commitments from investors, many of which committed around $1 billion. They did not specify whether those commitments are for the high-fee Pure Alpha funds or whether they are for their low-fee long-only vehicles.
A source at the firm told Fortune that Bridgewater's problem this year was that it cut risk in March during the selloff and then has been slow to ramp up again.