Bridgewater Bets Big on Market Drop
Comment of the Day

November 22 2019

Commentary by Eoin Treacy

Bridgewater Bets Big on Market Drop

This article by Juliet Chung and Gunjan Banerji for the Wall Street Journal may be of interest to subscribers. Here is a section:

Bridgewater paid roughly $1.5 billion for the options contracts, or just about 1% of the Westport, Conn., firm’s $150 billion in assets under management, according to people familiar with the matter.

The options contracts are tied to around $100 billion worth of the indexes, said people familiar with the matter. How much the firm stands to potentially make would depend on many factors, including the magnitude of any market decline and the timing of when the firm cashes in its bet.

It couldn’t be determined why Bridgewater made the investment. Several clients said it may simply be a hedge for significant exposure to equity markets the firm has built up. Funds often hedge, or take offsetting positions, against other exposure to protect against losses.

The massive size of the wager has prompted chatter among traders and caused the price of some options to rise.

There has been a surge in put options outstanding tied to the S&P 500 index. The number of S&P 500 put options outstanding hit the highest level in more than four years in September, according to data provider Trade Alert. There has also been growing interest in S&P 500 put options expiring in March, the data show.

Eoin Treacy's view

Ray Dalio stated today Bridgewater is not net short of the stock market. The firm’s investment strategy has long been characterised by risk parity which is aimed at capitalising on the continued correlation between stocks and bonds. The size of positions using such a strategy is tailored using volatility metrics. As volatility in one increases the weighting of that asset necessary falls and the weighting of a counterbalance increases and vice versa.

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