When Ray Dalio bets $1 billion on a crash it makes business headlines.
Ray Dalio’s Bridgewater, the world’s largest hedge fund has reportedly placed a $1.5 billion bet that stock prices will plunge in the next four months.
Ray Dalio’s $1.5 billion bearish wager consists of put options, which are derivative contracts that give investors the right but not the obligation to sell an asset at a specific time and price. So Ray Dalio’s bearish bet will create a big windfall for investors if stock prices tumble or crash from now until March 2020.
Moreover, Ray Dalio’s big bearish bet could also pay off if European stocks crash and the US stocks trade sideways during the next four months, according to in the Wall Street Journal.
“Ray Dalio’s Bridgewater, the world’s largest hedge fund has reportedly placed a $1.5 billion bet that stock prices will plunge in the next four months”
Conversely, Ray Dalio bets $1 billion on a crash based on put options could also lose money if stocks make new record highs into the first quarter of 2020
But while Ray Dalio bets $1 billion on a crash grabs the headlines perhaps it is not much more than business as usual for the hedge fund whose business it is to hedge.
Ray Dalio bets $1 billion on a crash sounds significant, but that is not the case for Bridgewater, the world’s largest fund in terms of assets under management
Put simply, despite Ray Dalio bets $1 billion on put investment Ray Dalio’s fund is still net long stocks. Ray Dalio Bridgewater’s $1.5 billion bearish wagers represent about 1% of the funds $150 billion of assets under management, according to the WSJ.
So nothing is alarming about a big hedge fund managers buying put options as a way to hedge their portfolio, or simply to make purchases to take advantage of inconsistencies in market trends.
“I want to make clear that we don’t have any such net bet that the stock market will fall”
RAY DALIO
Is then Ray Dalio bets $1 billion on a crash a misleading headline?
The hedge fund king has wasted no time to put the record straight. So here is Ray Dalio’s latest tweet regarding the $1 billion bets on a stock market crash.
“The Wall Street Journal wrote an article that said “Bridgewater Bets Big on Market Drop.” It’s wrong. I want to make clear that we don’t have any such net bet that the stock market will fall” wrote Ray Dalio on November 22.
Bridgewater was not “net short” and that it was wrong to label Ray Dalio Bridgewater’s fund as bearish on stocks, wrote Ray Dalio in a recent post on LinkedIn
Net short is when a portfolio has more funds invested in put bets that would increase in value if the market fell rather than call bets that would move up in value with a rising market.
At this point, it might be worth looking at the put-call ratio which shows an underlying security’s put volume relative to its call volume over some time (typically a day or week).
How is the put-call ratio calculated? It is calculated by dividing the put volume by call volume. When there are more open positions in puts than calls, the ratio is calculated to be above 1.
“The fact that Ray Dalio Bridgewater’s $1.5 billion bearish wagers represent about 1% of the funds $150 billion of assets under management tells us nothing”
To gauge the significance of Ray Dalio bets $1 billion on a crash we would need to calculate Ray Dalio Bridgewater’s put-call ratio
In other words, calculate Bridgewater’s put volume relative to its call volume over a specific time-frame and divide the two numbers.
If the funds exhibits a rising put-call ratio, or a ratio greater than .7 or exceeding 1, this would mean that Bridgewater is buying more puts than calls. If so, this suggests that bearish sentiment is building in the world’s largest hedge fund.
So we need to know Bridgewater’s put and call volume, an amount which regularly adjusts in response to changing macroeconomic data and monetary policy.
Ray Dalio bets $1 billion on a crash could also be true going forward
The fact that Ray Dalio Bridgewater’s $1.5 billion bearish wagers represent about 1% of the funds $150 billion of assets under management tells us nothing.
The real useful data would be to know what percentage of Bridgewater’s $150 billion of assets under management has been allocated to puts and calls. From that data, we could then calculate the put-call ratio and gauge Ray Dalio Bridgewater’s true market sentiment.
“Ray Dalio knows he is a big fish in a big pond and if the word gets out that Ray Dalio bets $1 billion on a crash that is likely to convince other fund managers to follow suit, to emulate”
What motivated the billionaire hedge fund manager to publicly refute the headline Ray Dalio bets $1 billion on a crash?
The creme de la creme of the hedge fund world are ace poker players, they have perfected the poker face, the art of bluffing and how to juggle risks. They have fine-tuned the art of playing the zero-sum game. Poker players make hedge fund winners. A study has found that the best hedge fund managers are the keenest poker players. If you invest in a hedge fund whose manager wins tournaments, then your expected return is 0.1 to 0.4 percent a month higher than one controlled by someone who stays out of the casinos.
The high stakes poker player never plays the game revealing his hand to his opponent. Equally, a top hedge fund manager rarely reveals specific details of where he is investing.
Ray Dalio knows he is a big fish in a big pond and if the word gets out that Ray Dalio bets $1 billion on a crash that is likely to convince other fund managers to follow suit, to emulate.
If the hedge fund king has turned bearish, then other fund managers will jump on the bandwagon, which could in itself trigger an avalanche of sellers and potentially a stock market crash.
If Ray Dalio bets $1 billion on a crash he would keep his move close to his chest trying not to reveal his move
Think about it. If every trader and his dog starts to buy puts in anticipation of a stock crash that would increase the cost of those puts. In other words, the cost of hedging against a crash would increase. So perhaps that is why Ray Dalio would rather build his position under stealth.
