So on Wednesday, we noted that according to his latest newsletter, Jim Grant is bearish on Ray Dalio. And Jim’s reasoning is pretty straightforward:
Activities [like] tweeting, promoting his book, attacking the press have one thing in common: They are not investing. Yet here he is, laying it all out to the world again – necessarily doing less of his day job than he would otherwise do.
Or maybe it wasn’t straightforward. The initial reporting on this centered around Jim’s critique of Bridgewater’s performance and the extent to which mediocrity might be to a certain extent attributable to Dalio focusing more on promoting his book than managing money.
And of course, our critique of Bridgewater remains the same as it ever was. For markets in general, the only question re: Bridgewater is this: will the correlations that underpin risk parity hold up? And if not, what happens when risk parity unwinds? Will it be, as many commentators have suggested, an aggravating factor that exacerbates an already bad situation? What happens, for instance, to a levered bond position in an environment where rates vol. suddenly spikes?
But as DealBreaker first detailed, Grant also had a thing or two to say about “transparency” or, more poignantly, a lack thereof. You can read the full post from DB here, but here’s a quick excerpt:
Long story short, we had to read this report from Grant’s. And now we have.
It reads less like a bearish take on Bridgewater than it feels like an attempt to pull back the curtain on Ray Dalio’s Mystery Kingdom in the Woods, but then finding that there are so many layers of fabric and folds that you can’t quite get a grip. Then you realize that the curtain was designed for just that purpose. And then you get really angry.
The most fun little tidbit in our estimation is the “unique” relationship that Bridgewater enjoys with its auditor:
The “related party information” schedule of the Bridgewater ADV form records the fact that Bridgewa-ter lends money to its auditor, KPMG, LLC. Or, more precisely, Bridgewa- ter owners with a greater-than-10% ownership stake in the Dalio firm are creditors to KPMG.
What, your hedge fund doesn’t have a circuitous transactional relationship with the company tasked with making it behave?
Well on Friday, Grant showed up on CNBC to “clarify” some things.
“We were wrong to question the relationship between the auditor and Bridgewater,” Grant said on CNBC’s “Closing Bell”. “Bridgewater is a secretive and eccentric firm and I let my suspicions of that get in the way of our ordinarily comprehensive due diligence.”
While Grant won’t retract the story, he did say that he shouldn’t have suggested something suspicious in Bridgewater’s relationship with KPMG.”Our failure to get the facts … It pains me greatly,” he added, noting that Bridgewater was “furious.”
“I ought to know better,” he concluded.
Yes, you “ought to know better” than to question Ray and his “Principles”…
For our part, we’ll continue to question whether Bridgewater poses a systemic risk and unlike Jim, we don’t care how “furious” Ray is.
Here’s the video:
And here’s the full transcript:
KELLY EVANS: WELCOME BACK LAST WEEK, GRANTS INTEREST RATE OBSERVER PUBLISHED A SCATHING CRITICISM OF BRIDGEWATER ADVISERS, THE WORLDS LARGEST HEDGE FUND RUN BY BILLIONAIRE RAY DALIO. THE NOTE CLAIMS RATHER THAN FOCUSING ON INVESTING DALIO IS BUSY PROMOTING HIS OWN BOOK, GIVING TED TALKS AND SPENDING TIME ON TWITTER THE REPORT ALSO SAYS THE FUND HAS AN UNTRADITIONAL FEE AND OWNERSHIP STRUCTURE RELIES HEAVILY ON ETFs AND CALLS OUT DEALINGS WITH ITS AUDITOR KPMG. BRIDGEWATER RESPONDED TO THE NOTE TELLING CNBC IN A STATEMENT, “THIS REPORT IS DEVOID OF PROPER FACT CHECKING, LACKS A BASIC UNDERSTANDING OF THE RULES, REGULATIONS AND PROCESSES OF THE SECURITIES INDUSTRY AND IS DEMONSTRABLY FALSE.” JOINING US NOW ON THE PHONE TO RESPOND TO ALL THAT IS THE MAN BEHIND THE NOTE, GRANTS INTEREST RATE OBSERVER FOUNDER AND EDITOR, JIM GRANT. WELCOME, JIM
JIM GRANT: THANK YOU, KELLY.
EVANS: WHAT WOULD YOU LIKE TO CLARIFY TO BEGIN WITH ABOUT THE NOTE GIVEN WHAT BRIDGEWATER JUST HAD TO SAY.
GRANT: IT WAS A 5,000 WORD ANALYSIS OF BRIDGEWATER AND CAME ESSENTIALLY IN TWO PARTS THE FIRST WAS A CRITIQUE OF BRIDGEWATERS ORGANIZATIONAL M.O. AND DESCRIPTION OF SOME OF ITS INVESTMENT TECHNIQUES. AND THE SECOND, THE MUCH MORE TITILLATING AND MUCH MORE FAMILIAR, NOTORIOUS NOW, PORTION CONCERNED AN ATTACK ON THE FIRMS COMPLIANCE AND REGULATORY PRACTICES. AND ON THAT, ON THE SECOND POINT, WE WERE WRONG IN PARTICULAR, WE WERE WRONG TO QUESTION THE RELATIONSHIP BETWEEN THE AUDITOR, KPMG, AND BRIDGEWATER. WE MADE IT OUT TO BE KIND OF A NEFARIOUS THING BECAUSE OF DISCLOSURE HAVING TO DO WITH A LENDING RELATIONSHIP WHICH TURNS OUT TO BE RATHER VANILLA LIKE AND WRONG TO SUGGEST THAT BRIDGEWATERS FORMER EMPLOYEES WHO WERE — HAD GONE TO WORK AT BANK OF NEW YORK MELON, KIND OF AN OUTSOURCING THING, WERE SERVING TWO MASTERS AND TWO OTHER THINGS HAVING TO DO WITH PRIME BROKERAGE RELATIONSHIPS AND FUTURE COMMISSION MERCHANT RELATIONSHIPS WE CAST IN THE LIGHT OF SUSPICION, WE CERTAINLY SHOULD NOT HAVE. BRIDGEWATER IS A SECRETIVE AND ECCENTRIC FIRM I LET MY SUSPICIONS OF THAT GET IN THE WAY OF OUR ORDINARILY COMPREHENSIVE DUE DILIGENCE AT GRANT. I REGRET THAT. I OWE CERTAINLY THE COMPLIANCE DEPARTMENT OF BRIDGEWATER, BEEN ON THE PHONE FOR THE PAST WEEK, I OWE THOSE PEOPLE AN APOLOGY WHICH I UNRESERVEDLY EXTEND. YOU KNOW, WE — I DO NOT RETRACT THE STORY IN TOTAL AT BRIDGEWATER. I THINK WE WILL CONTINUE TO AGREE TO DISAGREE ON SUCH THINGS AS THE RISK PARITY APPROACH TO BIG MACRO INVESTING, PERHAPS THE TURMOIL IN THE “C” SUITE AND SHEER SIZE OF ITS 160-ODD-BILLION BEHEMOTH, HOW SUCH A THING CAN GENERATE CONTINUOUSLY EXCELLENT RETURNS GIVEN THE DIFFICULTY OF BRINGING SOME OUT-PERFORMANCE OUT OF THESE BIG MARKETS
EVANS: JIM, IN WRITING ABOUT BRIDGEWATER, WHICH IS NOT A PUBLICLY TRADED COMPANY, SO YOU WERE SAYING, LOOK, IN A WAY WERE NOT SHORT THE COMPANY, WE CANT BE, BUT WE ARE WORRIED THAT THEY COULD BE THE FACE OF THE NEXT CRISIS. YOU COMPARED THEM TO LEHMAN, TO LTC BACK IN THE 90s DO YOU FEEL THAT WAY I KNOW WHAT YOURE SAYING ABOUT THOSE ISSUES YOU JUST MENTIONED ABOUT COMPLIANCE, SO FORTH, BUT YOU STILL THINK THAT THIS FIRM, ITSELF, POSES A THREAT TO THE FINANCIAL SYSTEM
GRANT: I THINK IT — I THINK ITS SYSTEMICALLY IMPORTANT BRIDGEWATER DENIES THAT, BUT I THINK ITS SYSTEMICALLY IMPORTANT. AND I THINK THAT ITS – IM GOING TO SAY IN A CONSIDERED WAY, ITS OBSESSIVE SECRETIVENESS IS NOT TO ITS BENEFIT AND EXCITES THE SUSPICION OF THOSE WHO WATCH IT WHICH IS NOT TO DIRECTLY TO ANSWER YOUR QUESTION, BUT DIRECT ANSWER, YES, I THINK IT WILL PLAY IN SOME WAY IN THE PEAK OF THE NEXT CYCLE, IT WILL BE SEEN AS, YOU KNOW, AS A FIGUREHEAD OF THIS PARTICULAR UPSWING IN CENTRAL BANK LEVITATED MARKETS AND IN, YOU KNOW, ABNORMALLY, IN FACT, UNIQUELY LOW INTEREST RATES. SO, YES, I DO THINK THAT BRIDGEWATER WILL BE THE FIGUREHEAD OF THE NEXT CRISIS.
SANTOLI: IS THAT, JIM, BECAUSE THE STRATEGIES THAT IT PRINCIPALLY EMPLOYS TO THE EXTENT THAT WE CAN INFER – WHAT THOSE STRATEGIES ARE, ARE SO LARGE AND CONCENTRATED AND HAVE SO MANY, PERHAPS, OTHER FOLLOWERS, THAT IT WOULD SIMPLY BE TAKEN TOO FAR? OR JUST BECAUSE, YOU KNOW, THEY’RE KIND OF THE BIGGEST AND BASICALLY THE MOST VENERATED FIRM? AND THOSE FIRMS ALWAYS END UP GETTING TARNISHED IN THE NEXT DOWNTURN. I MEAN, HOW ARE WE SUPPOSED TO KIND OF — ALONG WHAT STRAND OF THAT ARE WE SUPPOSED TO WORRY MUCH?
GRANT: I THINK BOTH. AS FOR THE STRATEGIES, WE CAN’T KNOW A GREAT DEAL, CERTAINLY IF BRIDGEWATER IS RIGHT, IT’S BEING A FREE COUNTRY TO SAY AS LITTLE AS IT CHOOSES TO SAY, WHICH IS VERY LITTLE, INDEED, ABOUT HOW IT ACTUALLY DOES BUSINESS. YOU KNOW, RAY DALIO IS ON RECORD SAYING – I GUESS ITS IN HIS BOOK – THAT HE KNOWS 1,000 UNCORRELATED TRADES. NOBODY ELSE ON WALL STREET KNOWS IT DOESN’T. BRIDGEWATER IS ON RECORD AS SAYING THAT IT EXTRACTS WHAT THEY CALL IN THE TRADE ALPHA BY SEPARATING THE GOOD PERFORMERS FROM THE AVERAGE ONES. AND IT DOES THIS APPARENTLY IN WAYS THAT HAVE NOTHING TO DO WITH SECURITIES SELECTION BECAUSE IT OWNS VERY LITTLE EQUITY AND IT OWNS MOST OF THAT, IT SEEMS, IN ETFs. SO, I’M SPEAKING AS AN OUTSIDER, I’M AFRAID, WITH OUR GAFFE – NOT GAFFE, OUR FAILURE – TO GET TO THE FACTS WITH RESPECT TO COMPLIANCE, AND I’M NOT SPEAKING EXACTLY WITH EXAULTED AUTHORITY ON THIS, BUT IT SEEMS TO ME THEIR APPROACH TO INVESTING IS MEGASIZED, THIS CONCENTRATION IN MARKETS THAT ARE NOTORIOUSLY DIFFICULT TO SUCCEED – AT LEAST TO SAY THE BIG LIQUID CURRENCY IN DEBT MARKETS. THEY’RE NOT UNCORRELATED IN MARKET, THEY’RE CORRELATED INTEREST RATES. SO I THINK ITS SIZE OF LOAN WOULD PRESENT THE SUSPICION THAT IT WILL FIGURE PROMINENTLY IN THE NEXT DOWNTURN. ITS SIZE, OF COURSE, HAS BEEN METEORICALLY GROWING SINCE 2008. AND I THINK THE NATURE OF ITS TRADING WILL PRESENT A DIFFICULTY IN THE NEXT DOWNTURN, IF THAT DOWNTURN, ESPECIALLY, IS CHARACTERIZED BY UNSCRIPTED RISE IN INTEREST RATES.
EVANS: JIM, HAS THE COMPANY THREATENED YOU WITH ANY LAWSUITS SINCE THIS PUBLICATION?
EVANS: SO THEYVE REACHED OUT TO YOU SIMPLY TO CLARIFY HOW THE COMPANY WORKS?
GRANT: WELL, THEY WERE FURIOUS. AND I MUST SAY THEY HAVE A CASE. I THINK – IT PAINS ME DEEPLY. YOU KNOW, WE’VE BEEN AT THIS AT GRANT’S FOR 34 YEARS AND I’VE BEEN AT THIS FOR MORE THAN 40 THAT IS TO SAY, WRITING ABOUT MARKETS. AND I OUGHT TO KNOW BETTER. AND WHEN WE AT GRANT’S, WE ARE CRITICS OF MANY THINGS, AND WHEN WE MOUNT ANALYSIS, WE OUGHT TO DO SO WITH EVERY SINGLE L FACT THAT CAN BE FACTUALLY DETERMINED YOU KNOW, ON, CHECKED AND SCRUBBED. AND WE DIDNT DO IT. SO, IS BRIDGEWATER ANNOYED? YES. AND SHOULD IT BE? YES. I’M AFRAID THE’YRE COMPREHENSIVELY ANNOYED RATHER THAN SELECTIVELY, BUT THAT’S THEIR PREROGATIVE, TOO.
EVANS: COMPREHENSIVELY ANNOYED. JIM, WE APPRECIATE YOUR CANDOR AND FOR CALLING IN ON THIS MATTER.
GRANT: OH, YOU’RE ENTIRELY WELCOME.
EVANS: THANK YOU VERY MUCH .THAT’S JIM GRANT OF GRANT’S INTEREST RATE OBSERVER.