Macro Billionaire Ray Dalio’s Intriguing Non-Denial Denial

By TradeSmith Research Team

The Wall Street Journal posted a headline this week that made Ray Dalio upset.

Dalio is a multi-billionaire and the 70-year-old founder of Bridgewater Associates LP, one of the largest macro hedge funds with $150 billion in assets under management.

We can see why the WSJ headline made Dalio mad — even though the story appears accurate. (Dalio didn’t deny the substance of the article — he just challenged the optics.)

The episode is worth unpacking because it touches on a key aspect of how markets work.

Here is the WSJ headline that left Dalio ticked off:

Bridgewater Makes $1.5 Billion Options Bet on Falling Market

The story went on to explain how, over a series of months, Bridgewater had built a $1.5 billion put option position against S&P 500 and Euro Stoxx 50 companies.

(If you have a WSJ subscription you can read it here.)

The WSJ further noted the position represents about 1% of Bridgewater’s assets under management ($150 billion). The puts have an expiration window of March 2020, right around the time a winner will emerge from the Democratic presidential primary. 

Dalio didn’t hold back in his irritated response to the story. “I want to make clear that we don’t have any such net bet that the stock market will fall,” he said.

“I believe that we are now living in a world in which sensationalistic headlines are what many writers want above all else, even if the facts don’t square with the headlines,” Dalio added. Ouch!

So, here is the interesting part. It appears the substance of the WSJ article was correct. Bridgewater likely did, in fact, buy $1.5 billion worth of put options with a March expiration.

But it’s also likely true this wasn’t a “net bet,” meaning an outright bearish trade on the market.

The phrase “net bet” was the key tell in Dalio’s response. When he said Bridgewater has no such “net bet,” what he meant was that Bridgewater was not shorting the market on the whole. 

Options contracts can be used in lots of ways. But to keep things simple, we can divide options purchases into two buckets. You can buy them as a speculation, or you can buy them as insurance.

A trader who buys put options as a speculative play, for example, might be making an outright wager that the stock market will fall.

If you think the stock market might crash, and you buy a boat load of put options, you can make a lot of money if your timing is right.

Investors, however, tend to buy put options for an entirely different reason. They buy them as a form of insurance, a hedge, against the stocks they already own.

Let’s say an investor has a $1 million stock portfolio and buys $10,000 worth of S&P 500 put options. This investor is not necessarily bearish on the market.

That is because, if the market falls, the investor might lose more on their $1 million worth of long stocks than they gain on the puts!

The purpose of the puts in that instance is serving as a form of insurance — comparable to the insurance premiums you might pay for your house, car, or boat.

With the Bridgewater story, what most likely happened is that Bridgewater purchased a block of put options — about 1% of its portfolio’s worth — as a form of insurance. The puts were a form of protection if markets fall sharply.

We can also see why Dalio was highly annoyed.

Most people, and certainly most politicians, don’t really understand how options work, and don’t realize you can use them as a form of insurance.

So when the WSJ wrote “Bridgewater Makes $1.5 Billion Options Bet on Falling Market,” the presumption in the public eye may have been that Dalio, and his entire firm, were aggressively bearish on the market.

Dalio was no doubt horrified by the political optics in that view.

Let’s say, just hypothetically, that stocks have a horrible December, comparable to the gut-wrenching drop they had in December 2018.

If Bridgewater’s put option pays off in that scenario, the perception might be that this big, arrogant hedge fund firm helped crash the market.

That would be bad for Bridgewater, and Dalio. And if they bought the options as insurance against their long equity positions, it wouldn’t even be accurate.

That is why Dalio pushed back. He wasn’t denying that Bridgewater took the $1.5 billion put option position. He was denying the implied reason why.

Investors, meanwhile, can reflect on the logical use of options for insurance in their own portfolios.

If you have a portfolio that has registered large gains in 2019 — which is entirely possible, as the S&P has clocked new highs almost two dozen times thus far — you might want to buy some put options as downside insurance, not unlike Bridgewater.

And if you did this, you wouldn’t be calling yourself out as a bear — you would just be showing some common sense. Everybody understands why houses and cars and boats need to be insured. Why not buy insurance for a large portfolio gain, too?

TradeSmith Research Team