The 3 Keys to the Success of Bridgewater, the Largest Hedge Fund Founded by Ray Dalio in 1975.
Ray Dalio managed to survive 47 years in an ultra-competitive sector.
The trader who won is the last one sitting at the poker table when everyone else has gone broke. After forty-seven years at the helm of Bridgewater, Ray Dalio, 73, has seen many of his competitors go under. He has been through many market and internal crises, but none of them have been fatal. He has survived in an ultra-competitive sector where the life expectancy of hedge funds is only a few years.
Ray Dalio leaves an empire to his troops, a $150 billion fund, and 1,300 employees. He has chosen to step aside after a long transition process of thirteen years, unheard of in the hedge fund world. He had stepped down from day-to-day management in March 2017 but remained co-chief investment officer and co-chairman.
He will still be a director and “investment mentor” of the fund he created not in his garage, like Apple for Steve Jobs, but in his two-room apartment in 1975. Most of Ray Dalio's fortune (19 billion dollars) is still invested in his hedge fund and especially in his flagship fund “Pure Alpha”. It jumped 35% in 2022, with long-term average performance of 11%, a rarity.
Since the COVID crisis, it is commodities and then his bets on rising interest rates (United States, Europe, United Kingdom) that have made him the most money. Ray Dalio has made money on the fall of the yen and lost money on emerging currencies and inflation-linked bonds. He is very cautious about stocks, both on Wall Street and in Europe.
1. Two strategies and no counterproductive diversification
The hedge fund has two main strategies, one offensive (“The Pure Alpha”) and the other defensive (“All Weather”). The first aims to find sources of return on all the major international markets by deciphering the economic situation and the risks. The second, as its name indicates, aims to generate respectable returns in all weather conditions and configurations.
This second strategy aims to outperform a 60/40 allocation (60% stocks and 40% bonds). This is the typical allocation of American pension funds. US pension funds, with $5.120 billion under management, are one of Bridgewater's target clients. If Bridgewater does better than them, it encourages them to invest in it.
This has not been the case this year, with its all-weather fund falling by 27%, compared with a 16% fall in a standard 60/40 pension fund allocation. This is the paradox of 2022: its riskiest fund has a historic performance gap (over 60%) with its supposedly more protective fund. Despite the pressing demands of some of its clients, the fund has resisted diversifying into new strategies and fashionable investment styles (ESG, activism ...).
Hedge funds that see their assets grow tend to move into other markets and trading styles where they do not necessarily have a competitive advantage. Their performance deteriorates. When Bridgewater feels that its assets are too large, it temporarily closes its funds to subscriptions. Bridgewater's only geographic diversification has been into China after a long journey.
2. No star traders or managers at Bridgewater
At Bridgewater, trading, analysis, and management are highly formalized and structured along the lines of quantitative funds like Renaissance Technologies. As soon as traders and managers of a hedge fund reach a certain level of success and notoriety, they think nothing of leaving their employer to start their funds. But when they leave, they also lose clients who want to follow them in their new entrepreneurial adventure.
This is what happened with Brevan Howard, which saw the departure of its star managers like Chris Rokos. His global macro fund has gained nearly 35% this year, almost twice as much (20%) as his former employer.
At Bridgewater, this risk of talent drain is reduced by the firm's consensual approach to risk-taking and investment. It is tailored to client requirements. The fund only targets institutional investors (pension funds, sovereign wealth funds, banks, insurers, US university foundations), not individuals. He wants to have clients who remain invested for a long time with him and who do not leave at the slightest market shake-up.
Ray Dalio communicates his vision of the economy and the markets to his clients through his regular letters. Even though he no longer has operational functions, he has not left the hedge fund icebreaker. He will continue to write about the economy and the geopolitical risks associated with the war in Ukraine.
3. The culture of risk and competition
Ray Dalio believes that corporate culture and organization play a key role in Bridgewater's performance. 58% of its trading operations were successful between the end of March 2020 and April 2022, according to his letter to investors revealed by Institutional Investor.
Internally, the competition must be as tough as with the outside world.
The fund wants to allow the best employees to win key positions. The fund sees everything in duplicate. It has two managing directors, two presidents, and two investment managers... This solution tests employees and their fit with the Bridgewater model, which encourages constant, full, and transparent criticism of all employees, regardless of their rank. John Rubinstein, an Apple alumnus who brought his expertise in technology and information systems, lasted barely ten months as co-leader.
In a highly individualistic industry, this fund puts the collective interest above egos. No one is irreplaceable at Bridgewater.
This organization protects the hedge fund from an unexpected departure. In early 2022, David McCormick, one of the principals, embarked on a political career without the same success, losing by 1,000 votes in the Republican primary for the Senate. He was replaced at the time by a duo of his deputy, Nir Bar Dea, and Mark Bertolini, co-chairman of the board.
Like Renaissance Technologies, the fund wants to have maximum control over its environment and be as autonomous as possible. It has its databases and even develops its computer language for programming. Its culture of risk goes back to its origins when the fund advised large companies.
In 1983, McDonald's, which was about to launch its McNuggets chicken donuts, called on Ray Dalio to design a hedging product. Chickens were not listed on the futures markets, so he built a sophisticated structured product incorporating the price of their feed, corn or soybeans, which were listed in Chicago.
