How Bridgewater Associates created the All Weather investment strategy, the foundation of the ‘risk parity’ movement JANUARY 2012
- After 27 years of relative monetary stability, the United States was breaking from the Bretton Woods system of fixed exchange rates that had tied the dollar’s value to gold.
- A broader perspective revealed that currency devaluations had occurred many times throughout history and across countries, and were the result of the same essential dynamics playing out under different circumstances.
- They, in this case the US, invariably print money to relieve the squeeze.
- Any return stream can be broken down into its component parts and analyzed more accurately by first examining the drivers of those individual parts.
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🔥 The price of a nominal bond can be broken down into a real yield and an inflation component.
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- A corporate bond is a nominal bond plus a credit spread.
- There are few ‘sure things’ in investing. That betas rise over time relative to cash is one of them.
- A US foundation came to Bridgewater with a question: how could they consistently achieve a 5% real return?
- It looked right, but would it fly?
- The eventual total portfolio ended up being a roughly 70/30 split between
beta and alpha (All Weather and Pure Alpha, Bridgewater’s actively-traded portfolio).
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💝 Overconfidence often pushes people to tinker with things they do not deeply understand, leading them to over-complicate, over-engineer, and over-optimize.
All Weather is built very intentionally to not be that way.
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https://www.youtube.com/watch?v=Nu4lHaSh7D4