With Ray Dalio gone and assets down, Bridgewater wants retail assets, but at arm's length; partner State Street will absorb hassles and risk for branding and fee opportunity

Bridgewater Associates, minus its maestro, Ray Dalio, is experiencing heavy weather. But now it hopes State Street can right the ship with an ‘all-weather’ strategy.

The Westport, Conn., hedge fund manager has contracted with State Street Global Advisors (SSGA) to wrap, distribute, finesse liquidity crunches, share brand risk, and absorb regulatory risk for an “all-weather” fund.

Bridgewater is targeting mass affluent investors while hedging its bets by doing business with alternative investment neophytes. In exchange, SSGA is getting some undisclosed cut of the fees, according to an SEC filing.

“It’s an asset gathering play, plain and simple,” says Brian Shapiro, founder of Altsmark, a Manchester, Vt. alts aggregator and performance reporter.

Bridgewater declined to comment for this article, but in a release, it cites State Street's “innovation” as a reason for partnering.

"We are excited to broaden access to our approach with an innovative organization like State Street Global Advisors,” said Bridgewater Co-CIO Karen Karniol-Tambour. 

If successful, it could also become “the very thing that Bridgewater has loathed for the last 25 years: an under-performing asset gathering machine, equivalent to any [vanilla] mutual fund or ETF,” Shapiro says. 

Why the bogeyman?

Bridgewater and SSGA formally announced their "strategic relationship" on Nov. 19, primarily to “widen access to core alternative investment strategies,” the release states.

“Bridgewater is the largest hedge fund manager with a strategy that can be a fit for the ETF structure, but little reach into retail segments below high-net-worth investors," says Daniil Shapiro, director for product development at Cerulli Associates in Boston, via email.

“Working with State Street allows them to reach a new client base,” he adds.

The Securities and Exchange Commission (SEC) has yet to green-light the new SSGA-Bridgewater fund. But SSGA should also be aware it will receive the major part of any investor ire the ETF accrues – if its risk-parity approach fails to perform in ‘all weathers,’ according to Brian Shapiro.

“Bridgewater doesn’t want to put itself in that position; why look like the bogeyman?”

Instead, Bridgewater says, “‘SSGA, you set this up, you front it, you distribute, we’ll sub-advise it, we'll give you the brand and the product that makes it easy for you to sell, and we’ll collect as much in fees as we can.

Its interest is “the pursuit of AUM and nothing more,” he says. 

Rewired

Dalio has been considered one of the best-performing money managers in the world. The fund generated net gains worth $55.8 billion since its inception in 1975, and Dalio exited with a net worth estimated at $19 billion.

But it's struggled since Dalio's departure in 2022. Bridgewater managed $160 billion as recently as 2020. It reported AUM of $112.5 billion as of Dec. 31, 2023.

New CEO Nir Bar Dea told the Financial Times in May the hedge fund had to be completely “rewired,” to boost performance and find its “independence,” following Dalio’s exit. 

“Everything has to get rewired. It’s like taking a brain and a heart out of a human and then planting a new brain and a new heart,” said Bar Dea who was named CEO in March 2023. 

Bridgewater tried to reach high-net-worth retail investors once before. See: Ray Dalio finally deigns to let RIAs allocate AUM to Bridgewater funds.

Its private-labeled iCapital software is a muted success, a source says, which likely left it searching for higher throughput.

Sound good, gather dollars

The launch of the SSGA ETF certainly indicates a doubling down on Bridgewater's pursuit of new investment capital, and it will save the latter firm the difficulty of rewiring its own platform to cope with any surge in investor volume, according to Brian Shapiro.

“From [Bridgewater's] perspective, it doesn't have to [perform] well, it just has to sound good and gather dollars ... [without] the headache of restructuring and creating new sleeves and new feeder funds to feed in into the [actual] all-weather fund,” he says.

Still, one plus one may not equal three.

"Bringing millions of retail investors into their traditional alts fund structure is difficult; the platforms weren’t built for retail volume," he adds.

Bridgewater's ADV does not even mention retail investors as clients. 

Indeed, its client and fund investor base consists of corporate and public pension funds; foreign governments and central banks; university endowments and charitable foundations; family offices and fund-of-funds, union/Taft Hartley plans and similar third-party entities,” the SEC filing says.

Natural avenue

State Street, which manages $4.7 trillion, will provide its sales force, ETF-making expertise, retail reputation, and shared liability, too.

In exchange, it gets the right to stick the Bridgewater brand on its SPDR ETF line – specifically, its well-known All Weather Funds, according to SEC filings.

“A natural avenue for traditional managers to offer specific alternative capabilities is to partner with a well-known manager who can provide brand recognition,” says Daniil Shapiro.

“Advisors and individual investors who value the Bridgewater brand and strategy will have a simplified point of access. The largest hedge fund firm making their strategy available through an ETF is a win for the ETF industry,” he adds.

“Why does Bridgewater need SSGA?" Asks Brian Shapiro.

"It’s simple ... they have a massive retail distribution capability directly, and wholesale capability through all the RIAs that use their funds. They’ll act as the frontman," he adds.

Bloatware?

Yet what SSGA and the ETF industry won't get – at least for now – is access to Bridgewater's other major calling card, "alpha," through its flagship Pure Alpha fund.

Instead, SSGA will manage a more vanilla ‘risk-parity’ fund, which will function as a rough duplicate of the Bridgewater all-weather fund. 

The all-weather fund is designed to stay afloat in all sorts of markets, although many risk-parity funds took a hammering during the 2020 COVID-19 crash. 

To achieve less risk, the all-weather fund mixes stocks, bonds, and commodities. Then, it leverages them to achieve an equal investment weighting based on their volatility, rather than their value.

The problem is that the SSGA fund, as an ETF all-weather replica, ipso facto will be of less value to investors, because it will have to exclude some investments and simplify others to meet regulations, according to Brian Shapiro.

“SSGA is not buying alpha, they're replicating it. [The fund] won’t have all the same exposures, and it won't be a one-to-one mirror, because it has to maintain a certain amount of liquidity and dynamic pricing capability to get net-asset-valuation [data] in every day,” he explains.

The new fund, effectively a model portfolio updated daily by Bridgewater, will invest in line – but not identically – with Bridgewater's all-weather fund. But it will remain under SSGA's overall discretion, according to SEC filings.

Change the conversation

SSGA's keenness to push into alts comes following the onboarding of SSGA Chief Business Officer Anna Paglia, a Nov. 2023 poach from Invesco. Paglia is an alts advocate, according to a source.

State Street CEO, Yie-Hsin Hung, was hired in 2022, in part, to freshen up the firm's ETF business, the source notes.

Going active or going alts provides a clear way to juice revenues because passive funds are in a race to near zero fees, says Daniil Shapiro.

"A key differentiator is the offering of more outcome-oriented solutions, and advisors are interested in including alts …  [but] struggle to access less than fully liquid alts product due to burdensome subscription and redemption processes.

“The shift represents a lean into investment exposures that are more differentiated … with a benefit of being able to charge more for such an exposure than a passive ETF,” he adds.

Seeking new clients

SSGA-parent State Street Corp. could certainly benefit from greener pastures, given its lackluster share price performance. 

Today, it trades at $98.25, just 17% higher than its pre-Great Recession, Feb. 2008, high of $83.92, and 8.4% off its Jan. 2018 high of $107.24.

Bridgewater is also counting on an influx of new clients, according to a recent release.

Karniol-Tambour and Bridgewater balanced asset strategies head Christopher Ward will build and sub-advise the new ETF.

Parity problem

Risk parity funds – once a salable buzz label – have been out of favor as of late.

Described as 'untrendy' by the Financial Times (FT), the approach has suffered due to the sustained poor performance of the bond market. 

In recent years, it has more often than not under-performed a classic 60/40 fixed-income portfolio.

The average five-year projected return of 122.4% posted by five separate S&P “risk parity” indices also trails by almost 70% the performance of the S&P 500, up 192.15% over the last five years.

“The only time risk parity was really successful was at the time of the Great Financial Crisis and that was really its heyday," Eileen Neill, managing director at Verus Investments, told the FT.

Since then, the funds have fallen by the wayside. 

Liquidating funds

Verus, which advises New Mexico’s roughly $17 billion public employee pension scheme, dropped its allocation to risk-parity funds in Dec. 2023.

After years of negative publicity, San Francisco robo-advisor Wealthfront also announced, on Nov. 4, that it is also closing its risk parity fund in January.

“It is in the best interests of the Wealthfront Risk Parity Fund and its shareholders that the Fund be liquidated,” Wealthfront SEC filings state.

The new Bridgewater-SSGA ETF will adopt a middling volatility weighting of between 10% and 12% – Bridgewater offers weightings ranging between 8% and 14%, and the S&P tracks weightings up to 15%.

The S&P risk parity index for 12% volatility-weighted fund performance posts a five-year likely performance of 139%. The 10% index posts 136% prospective five-year returns.

The Trump trade

State Street declined to answer when the new Bridgewater-branded fund will launch; whether it accepts the characterization of its partnership with Bridgewater as a ‘distribution play’; or precisely where the new ETF will differ from the core Bridgewater All Weather portfolio.

It also declined to comment on whether it is confident of avoiding prospective brand risk if risk parity slumps again, as it did in 2020; or why it is making a concerted bid to launch a slew of new* alts funds, the Bridgewater ETF included. See: Apollo partners with SSGA for private credit moonshot.

Yet its flurry of fund launches is likely – at least in part – driven by the election of Donald Trump as president, given the far lighter touch approach his administration is likely to take to regulating the financial services industry, sources say.

“Don't be surprised at seeing all sorts of schemes over the next bunch of years,” says Brian Shapiro.

“The election result has fueled industry optimism for several frontier product development initiatives including private capital ETFs, greater access to alternatives in DC plans, and dual share class mutual fund and ETF product,” says Daniil Shapiro.

* Ray Dalio, 74, founded Bridgewater in 1975, and launched the All Weather fund in 1996. He green-lit Bridgewater's first RIA marketplace foray in 2021, but stepped down soon after in 2022, following a dispute with shareholders. He has repeatedly sought to return to the firm in some capacity.

* In September, SSGA launched three new cryptocurrency funds – in partnership with Galaxy Asset Management – which mix investments in crypto companies and cryptocurrencies. In October, SSGA partnered with Apollo Global Management to develop a – much-criticized – private credit ETF.