The U.S. Fed decision to increase interest rate and end its quantitative easing (via bond purchases) by March is unlikely to make cash and bonds attractive. Instead, the world’s biggest hedge fund manager sees merit in investing in the yellow metal.
Ray Dalio, founder and co-chief investment officer of Bridgewater Associates, which manages over $150 billion in assets, tells Fortune India, "As an investor I worry about cash and debt returning much less than inflation, and I would worry about not being well diversified."
While the quantum of hike is not clear, the Street is feeling the blues as they expect the central bank to quicken the pace of hikes to contain inflation, which is now a four-decade high of 7%. “The projected rate increases will not be adequate enough to make cash and bonds an attractive alternative, and neither will it be enough to curtail inflation. So, in relation to inflation there will still be negative returns in those assets even if there is a rate hike.
While gold has delivered negative returns last calendar year, cryptos have been crashing since the end of 2021, with the era of easy money coming to an end. In fact, bitcoin has come down to $36,000 level. The store of value digital currency has come off over 20% since the beginning of the year and has nearly halved from it's all-time high of $69,000 hit in November last year. Yet, according to a research by Bridgewater Associates, though cryptos are still far from being huge markets, Bitcoin and Ether have become large and liquid enough for institutional investors to invest. While Bitcoin is estimated to be about 1.4% as liquid as US equities — resulting in a much smaller capital position — but given its high volatility, even a relatively smaller allocation in dollar terms would still give meaningful exposure on a risk-adjusted basis, feels the hedge fund firm. In other words, institutional investors can build a liquid cryptocurrency allocation comparable in risk exposure to gold or inflation-linked bonds.
Dalio tells Fortune India that while Bridgewater has a very small percentage — around 1-2% — of its portfolio in cryptos, the hedge fund sees more value in gold. In CY20, the traditional hedge against inflation had delivered a record 25% return to investors, but fell 7% last year. In fact, Bitcoin outperformed gold for the third straight year, delivering 70% in CY21 at a price of $48,000.
Though the hardening of 10-year yield has impacted not just equities but even gold, Dalio is not too worried. "I have a greater allocation towards gold, particularly in the portfolio designed to protect, and then there are inflation-indexed bonds and some other assets," mentions the 72-year-old.
Though the hedge fund manager has cautioned that financial assets relative to real assets are dangerously high, he chose to play it by the ear on being asked how close is the tipping point.
“We are getting dangerously close. But it’s very difficult to gauge the exact timing even if we were to look at the next three-four years,” sums up Dalio.