Ray Dalio’s Pure Alpha Fund

Ray Dalio’s Pure Alpha Fund returned 14.6% for 2018. That’s an amazing feat considering the majority of hedge funds averaged a loss of 6.7%. How does he do it? Simple. He always asks, “how do I know I’m right?”

The Westport, Connecticut-based firm is the world’s biggest hedge fund with about $160 billion in assets. The gains for its Pure Alpha Strategy came as other fund managers were whipsawed by volatile markets, resulting in the industry posting one of its worst years ever.

Via Bloomberg

How do I know I’m right?

I can’t begin to guess how his Alpha Funds works internally, how complex it must be. If his book is any indication (a great summary here), then I can guess it’s well thought out with one simple premise, “how do I know I’m right?”

Think about it, 1,000’s of Hedge Funds are operating on similar strategies all the time. They’re either macro, long/short, arbitrage, whatever… What does he do that’s so different than all the rest? The nugget of truth is in his in Ray Dalio’s questioning himself all the time with “how do I know I’m right?”

If you believe the market is going to crash when it’s at an all-time high, how do check yourself? How, in your infinite wisdom, do you test and confirm that you are correct and the 1,000’s of fund manager and quants have it wrong?

History Rhymes

Another great aspect of Ray Dalio’s strategy is that he looks in history where a current similar situation has occurred. According to him, he goes back about 500 years in economic/political/cultural history and looks if something similar (debt crisis, tulip mania, etc) has happened and what the outcome was. Then he adjusts his strategy accordingly.

One great example was when the US abandoned the gold standard in 1971. His initial thought was that the market was going to crash but was shocked to learn that the markets opened higher. Later he learned that history is littered with a few examples where this has happened before. The inflationary result of abandoning the gold standard lifted asset classes higher.

While history doesn’t necessarily repeat itself, it tends to rhyme a lot. Perfect current example: Bitcoin. Bitcoin is a lot like the Tulip Mania (and other manias for that fact). While I’m bullish on Blockchain technology, I’m not sure if Bitcoin will survive to become a sorely needed digital currency.

No matter what industry you come from, you should always ask yourself if you’re right and how can you confirm it. Once you’ve identified the known-knowns (the market already has), the known-unknowns (maybe the market has), and the unknown-unknowns (no one has, but history might provide a guide), then you can apply strategies and processes to win.

Now, ask yourself: How do I know I’m right?

Bitcoin is not dead

According to Howard Bitcoin is not dead. I agree with him that price is a big indicator of where things are going but I can’t help but wonder that this sudden uptick in cryptocurrency jobs is just a lag effect from when Bitcoin was $19,000.

I know people on both sides of the Bitcoin/blockchain fence. The risk takers tend to be long Bitcoin whereas the lower risk folks tend to think it’s a sham.

That, right there folks, is a market. The Bulls and Bears in our daily life.

Update

I posted this article back in April of this year. Since then Bitcoin and other cryptocurrencies have collapsed in a spectacular fashion. The air camp out of this sector and many people got caught holding the bag. 

When I get to around to reposting the conversation I overhead in the old office, about a guy’s son investing all his savings in Bitcoin, I think you’ll cry. 

Do I still have some Ripple and Ethereum, yes. I will probably hold that stuff till it’s worthless. 

Did I lose BIG money in this? Nope. I cashed out a lot of positions on the way up and reinvested the ‘house’ winnings in other crap.

It’s the Blockchain, stupid.

I’ve been a big fan of Bitcoin for a while and the potential for a true digital currency, but lately it’s been having problems. Some prominent voices in the Bitcoin world actually say it’s dead and that got me a little worried. I’m no longer bullish on the Bitcoin currency itself partly because of Hearn’s departure from the project, but mostly because first innovators usually don’t survive. I believe something else will take Bitcoin’s place one day as the defacto digital currency. In the meantime it’s all about the Blockchain, stupid.

Bullish on Blockchain

That said, I’m actually quite bullish on this technology. It’s the system that makes Bitcoin work.

Perhaps the most interesting thing about blockchain is that there’s no central authority or single source of the database. Which means it exists on every system that’s associated with it. Yes, every system has its own complete copy of the blockchain. As new blocks are added, they’re also received by every system – for the ultimate distributed database. If you lose your copy, no problem. By rejoining the blockchain network you get a fresh new copy of the entire blockchain. (h/t @ischwartz)

You can’t have Bitcoin without a Blockchain but you can have a Blockchain without a Bitcoin. In fact you can create a Blockchain for all kinds of things, especially financial transactions.

When you talk about blockchain in the context of Bitcoin, the connection to Big Data seems a little tenuous. What if, instead of Bitcoin, the blockchain was a ledger for other financial transactions? Or business contracts? Or stock trades? The financial services industry is starting to take a serious look at blockchain technology. Citi, NASDAQ, and Visa recently made significant investments in Chain.com, a Bitcoin blockchain service provider. Oliver Bussmann, CIO of UBS, says that blockchain technology could pare transaction processing time from days to minutes.” via Web 2.0 Journal

I think it might be time invest in these types of Startups.