Bridewater Founder Ray Dalio had a great year last year. His fund, Pure Alpha generated a return of 14% when 70% of hedge funds lost money last year and the average fund fell 18%.
Where does Dalio think then economy is going? He call it a D-process, which is when an economy has an unsustainable high debt burden and monetary policy ceases to be effective (interest rates being close to zero) and as a result the central banks has no way to stimulate the economy. To compensate, the value of debt must be written down (depression) or the central bank must print money (inflation).
The level of debt as % of GDP in the US has skyrocketed past the previous highs last seen in the early 1930s.
Dalio's view is that stocks will get materially cheaper and that we will have to go through an important debt restructuring program; lots of assets will be going on sale and there will be a shortage of buyers.
Hedge funds will not be immune. Hedge funds are 75% correlated to the S&P.
Fortune Magazine - March 30, 2009
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