Bridgewater surges on bearish euro bet, low rates

Ray Dalio speaks with CNBC at the 2014 WEF in Davos, Switzerland.
Patrick Bucci | CNBC
Ray Dalio speaks with CNBC at the 2014 WEF in Davos, Switzerland.

The largest hedge fund firm in the world has made a killing this year by correctly predicting two big trends: the continued decline of the euro and a delay in increasing U.S. interest rates.

Thanks to those bets and more, the main fund run by Bridgewater Associates, Ray Dalio's $169 billion institutional investor-focused firm, gained more than 14 percent net of fees in the first quarter, according to two people familiar with the performance.

The large return was partially driven by negative bets on the value of the euro, a short, coupled with a long position in the U.S. dollar, according to one of the people. Bridgewater's Pure Alpha hedge funds also gained by correctly predicting that there would be a delay in the increase of U.S. interest rates, a bet expressed by bullish positions on 10-year U.S. Treasurys, for example.

How did hedge funds fare in Q1?
How did hedge funds fare in Q1?   

A spokesman for Westport, Connecticut-based Bridgewater declined to comment.

The bet against the euro is a popular one for "macro" funds like Bridgewater that wager on broad macroeconomic trends using stocks, bonds, currencies, commodities and more.

Read MoreHow the smart money is set up for a Fed rate hike

The euro fell more than 11 percent versus the dollar from January through March, spurred in part by renewed economic stimulus programs from the European Central Bank. The common currency is down nearly 32 percent against the greenback since highs in July 2008.

By contrast, many macro funds shorted interest rates earlier this year in the anticipation that rates would rise later in 2015. But 10-year U.S. Treasury notes gained 2.6 percent in the first quarter, bucking expectations.

Bridgewater typically bets on dozens of markets at once, making its portfolio relatively unconcentrated. Besides the bearish euro bet, winning positions for Pure Alpha funds in January included a long bet on the Japanese yen versus a short bet on the euro. The fund also made money on long stock bets in Europe, according to the person briefed on the performance.

In February, the largest winner was a long bet on Japanese equities, plus gains on U.S. and European stocks (also long). Smaller gains were made by betting long on interest rates in the U.S. and U.K., the person said.

In March, the largest gain came from a short of the British pound versus a long on the U.S. dollar. There were also winning short currency bets on the euro, Brazilian real, Australian dollar and Canadian dollar, according to the individual. Other winners were bullish bets on stocks and interest rates from both the U.S. and Japan.

Those portfolio gains came as Dalio recently expressed concern about making big investment bets ahead of a potential interest rate increase by the Federal Reserve.

"We expect a Fed tightening and are cautious about our exposures," Dalio and Mark Dinner of Bridgewater wrote in a private note to clients and other followers March 11.

Read MoreDalio: Fed risks toppling apple cart, 1937-style

Bridgewater's performance far outpaces many other hedge funds.

The average macro fund is up just 3.07 percent net of fees as of April 1, according to a report by Bank of America Merrill Lynch. The average return for all hedge fund strategies was 2 percent over the same period.

Read More'Machine' Ray Dalio takes on 'Man' Bill Ackman