How Does the World’s Largest Hedge Fund Really Make Its Money?

[james22]

Ray Dalio’s investing tactics have always been a closely kept secret, even inside Bridgewater Associates. Several years ago, some of Wall Street’s biggest names set out to discover his edge.

 

https://archive.ph/6kI4Y#selection-373.0-373.62

[changegonnacome]

Yeah read the article - very interesting wont do any spoiler - pre-ordered the book.........and must dig out Jim Grant's piece on them from back in the day

[james22]

On the first page of his best-selling memoir, Ray Dalio unburdens himself of the opinion that he is “a dumb sh*t.” Nothing in the ensuing six hundred or so pages convinced me that I should dissent from this verdict. ...

I do not wish to give the impression that Principles is the worst book I have ever read for professional reasons, or that narcissism, sophistry, and illiteracy are the only things in it. They’re just the only things that I can glean from its nearly six hundred pages. ...

Don’t misunderstand me: I’m not saying that Ray Dalio is Hitler. Among other things, he lacks both the führer’s undeniable musical taste and his vegetarianism. ...

 

https://americanaffairsjournal.org/2018/11/principles-for-dummies/

 

Hahaha.

[TwoCitiesCapital]

2 minutes ago, james22 said:

On the first page of his best-selling memoir, Ray Dalio unburdens himself of the opinion that he is “a dumb sh*t.” Nothing in the ensuing six hundred or so pages convinced me that I should dissent from this verdict. ...

I do not wish to give the impression that Principles is the worst book I have ever read for professional reasons, or that narcissism, sophistry, and illiteracy are the only things in it. They’re just the only things that I can glean from its nearly six hundred pages. ...

Don’t misunderstand me: I’m not saying that Ray Dalio is Hitler. Among other things, he lacks both the führer’s undeniable musical taste and his vegetarianism. ...

 

https://americanaffairsjournal.org/2018/11/principles-for-dummies/

 

Hahaha.

 

someone had an axe to grind...

 

We can debate whether or not we agree with their investment approach or his management style, but this journalist is coming out hard against someone who has achieved professional success most people can only dream of...

[james22]

18 minutes ago, TwoCitiesCapital said:

 

someone had an axe to grind...

 

We can debate whether or not we agree with their investment approach or his management style, but this journalist is coming out hard against someone who has achieved professional success most people can only dream of...

 

I can say honestly, in keeping with the book’s own serial inducements to “radical transparency,” that my endorsement of Dalio’s conclusion about his own intelligence was arrived at without prejudice. Cognitive bias had no role, only the preponderance of textual and pictorial evidence.

 

Before I was asked to review Principles, I had never heard of its author or of Bridgewater, the investment firm that Dalio founded in his apartment four decades ago. As far as I knew, the present volume would turn out to be a monograph on virtue ethics or a history of post-Trotsky dissent within the Eastern bloc for general readers. 

[ValueArb]

I thought the point of Bridgewater wasn't that it would beat the market, but that it would have okay returns while have much smaller drawdowns than the market. Because outside of the GFC it hasn't been a market beater. 

 

The other point is that Ray Dalio is a master salesman. He's sold the world on the idea that he's an elite investor, that Bridgewater is an elite investment firm, and gotten a huge amount of professional trustees to buy into it with funds entrusted to them.

 

Mr. Dalio drew an indecipherable chart on a dry-erase board and rambled on about the nature of markets. He barely mentioned the specifics of Bridgewater’s approach, according to a person present. There was an undeniable charm — and confidence — to it all.

 

Bridgewater’s marketing team had seen this move before. The end goal would be something other than money. So when Mr. Otemurat raised the prospect of investing $15 million in Bridgewater’s main hedge fund, the fund’s representatives shooed away the suggestion. “We don’t want a relationship with you right now,” one marketing executive said. “We’re in it for the long game.”

 

Inside Bridgewater, a relationship meant access. The country’s new oil field had taken more than a decade to develop, with near-constant delays. Anyone who knew how the project was proceeding could adjust bets on oil accordingly. Bridgewater’s representatives told the delegation that their firm would be happy to offer free investing advice, and Bridgewater’s team would likewise appreciate the opportunity to ask questions about industries of local expertise.

Mr. Otemurat and others in his delegation seemed eager to chat.

 

Soon enough, Bridgewater got it both ways. A few months after Mr. Otemurat’s Westport visit, the Kazakh fund asked again if it could invest in Bridgewater’s funds. This time, it dangled a sum far larger than $15 million, and Bridgewater assented, former employees said.

 

[Gregmal]

Nothing new. Most of the “most successful investors” or “hedge fund titans” are equally if not greater salesmen. 
 

Even the not so great investors like Pabrai, can sell water to someone who’s drowning. 

[UK]

https://www.bloomberg.com/opinion/articles/2023-11-07/bridgewater-had-believability-issues?srnd=premium-europe

 

With the hope of turning around the firm’s investment performance, members of the Circle of Trust put together a study of Mr. Dalio’s trades. They trawled deep into the Bridgewater archives for a history of Mr. Dalio’s individual investment ideas. The team ran the numbers once, then again, and again. The data had to be perfect. Then they sat down with Mr. Dalio, according to current and former employees who were present. (Lawyers for Mr. Dalio and Bridgewater said that no study was commissioned of Mr. Dalio’s trades and that no meeting took place to discuss them.) One young employee, hands shaking, handed over the results: The study showed that Mr. Dalio had been wrong as much as he had been right. Trading on his ideas lately was often akin to a coin flip. The group sat quietly, nervously waiting for the Bridgewater founder’s response. Mr. Dalio picked up the piece of paper, crumpled it into a ball and tossed it.

[james22]

 

[TwoCitiesCapital]

So, full disclosure: 

 

I worked for, and with, Bridgewater from 2011 - 2014. I've never met Ray, or Bob, but did meet Greg once. I met Eileen Murray on one or two occasions as well. I was NOT regularly involved in the meetings where investment decisions were made and did not work regularly with any of the executive committee or investment teams outside of my limited capacity. 

 

All of that being said, there were definitely peculiarities to how Bridgewater did some things. Some were good. Some I disagreed with. Almost ALL were exaggerated by the media from what I could tell during my time there. I'll still probably buy and read the book just out of curiosity. 

 

I could believe some of the stories I've seen in the media from the book might be true - or be embellished based on a kernel of truth. But to paint Ray out to be an attention-seeking dude with no investment talent and just masterful at lying/deceiving  clients is a hard swallow ... especially given their performance in certain off years like 2008 and again in 2022. Are all the employees they hire, and pay 6-7 figures to, just a smokescreen to cover Ray's strategies? If he's such an attention seeker, why do that instead of accepting credit for the trades? How do they seem to regularly do well in the big down years for the market like the tech bubble, the real estate bubble, and years like 2022 when they were up 30+% at one point while the market was down (ended the year at +7-8% IIRC). 

 

Has anyone considered that perhaps it's this journalist seeking attention and making a name for himself by intentionally going after a whale like Ray? 

Edited November 14, 2023 by TwoCitiesCapital

[ValueArb]

Bridgewater has had mediocre returns overall, it trails the market until a crisis then catches up a little. That's the problem with believing Ray is an investing genius, he comes off as a chicken little stopped clock that's right twice a decade.

[thepupil]

10 minutes ago, ValueArb said:

Bridgewater has had mediocre returns overall, it trails the market until a crisis then catches up a little. That's the problem with believing Ray is an investing genius, he comes off as a chicken little stopped clock that's right twice a decade.

 

agree w/ the facts regarding performance, but don't think anyone is investing in Pure Alpha to beat the stock market. 

[ValueArb]

8 minutes ago, thepupil said:

 

agree w/ the facts regarding performance, but don't think anyone is investing in Pure Alpha to beat the stock market. 

 

Agree with this. He made his bones calling a crisis, and convinced a massive amount of pension and other managers they needed Pure Alpha as a hedge in their portfolios.

[thepupil]

14 minutes ago, ValueArb said:

 

Agree with this. He made his bones calling a crisis, and convinced a massive amount of pension and other managers they needed Pure Alpha as a hedge in their portfolios.

https://www.institutionalinvestor.com/article/2bstqfeujm1aoa2jaqkg0/corner-office/fifty-years-ago-rusty-olson-began-investing-kodaks-pension-thanks-to-tom-mucha-hes-reaping-the-rewards

 

it worked for these guys at least, not so sure about other LP's. Bit of a fluff piece w/o quantification, but they do give them credit. 

 

Quote

At first, Kodak’s solution was to run a fixed-income strategy that was benchmarked against 25-year zero-coupon bonds, with the aim of hedging against deflation while keeping Kodak’s bond allocation low.

Olson recalls sharing the strategy with Dalio, who replied: “Rusty, you’re doing it all wrong. You want to be using futures.”

Dalio walked him through Bridgewater’s Pure Alpha strategy. And to Dalio’s delight, Olson almost immediately saw how it worked.

“He understood how we could take alphas and separate them from betas and put them into portfolios,” Dalio explains. “He intellectually understood, and he allowed us to do it. That was almost off the wall at the time.” Back then, Bridgewater had very few institutional clients, and none the size of Eastman Kodak. In other words, Olson put Bridgewater on the map. And for Kodak, it was worth it.

“It turned out that Ray was the most valuable person we had among our managers,” Olson said. “Bridgewater contributed more value to the fund than all the other good managers we had.”

 

Edited November 14, 2023 by thepupil

[ValueArb]

1 hour ago, thepupil said:

“He understood how we could take alphas and separate them from betas and put them into portfolios,” Dalio explains. “He intellectually understood, and he allowed us to do it. That was almost off the wall at the time.”

 

This is the kind of BS that is why Ray is viewed as a joke.

[Gregmal]

Peoples desire to be in the stock market without accepting the risks that come with being in the stock market continues to make clever salesmen rich…when will they learn? Probably never. Especially if you tell them scary stories.

[james22]

14 hours ago, TwoCitiesCapital said:

Has anyone considered that perhaps it's this journalist seeking attention and making a name for himself by intentionally going after a whale like Ray? 

 

Did you watch the interview? He answers most of your questions pretty well.

[TwoCitiesCapital]

3 hours ago, james22 said:

 

Did you watch the interview? He answers most of your questions pretty well.

 

I watched the whole thing - which is why I can point out the inconsistencies of his implying that Ray is just an attention seeking marketing genius out of one side of his mouth while then implying everyone who works at the firm, and the systematic trading in place, are all just a cover-up/smokescreen for it all actually just being Ray. 

 

Those are at odds with one another (and what I saw from my experience there). Like I said, I wouldn't be surprised if there was a kernel of truth in everything he wrote. I also wouldn't be surprised if it was exaggerated like much of what I witnessed the media do while I was there. I'm guessing the journalist is trying to make a name for himself and was happy to go after a whale like Ray to do it. 

 

Like I said, I'm still gonna read the book. I love a good drama and the dirt on billionaires. But I also know that the picture I've seen painted from the summaries/reviews I've seen so far don't align with what I witnessed the 4-years I was there. But I was a happy employee so perhaps my perspective differed from those who were discontent. 

 

Of the three institutional money managers I've worked for, Bridgewater was by far the best from an employees perspective 

Edited November 14, 2023 by TwoCitiesCapital

[james22]

Fair enough.

[sleepydragon]

Ray Dalio is married to the same woman for the last 30 or 50 years. I think he’s a decent guy. He is a bit crazy on his “principles” and that might have made Bridgewater a little suffocating place to work (but other places are worse, some are a lot worse). At lease Ray pays everyone well while they are there. 
 

People cared a lot about if he’s an investment genius or his pure alpha strategy etc. imo, that doesn’t really matter. That’s not how Bridgewater makes money. Bridgewater got a lot of  AUMsfrom foreign govt (at the same time he probably get some insights which may have helped his pure alpha directional bets on big macro ideas). How do make these foreigners give their nation’s sovereignty fund to you to manage? You got to be very good at explaining how “economic machines” work etc.. he is really good at that. And the investment strategists (aka salesman) are super good at that.

 

Now he’s retired, does the people left behind In Bridgewater know how to make money (or get money from investors )? They might think they know.

[LongHaul]

I have also heard a lot of positive things about Ray Dalio from someone who worked there.  

I respect him and enjoy learning from him.  I think he is genuinely trying to teach people.  

He doesn't exactly come across as a super slick salesman. 

 

Anyone can criticize anyone else.  Easiest thing in the world.  

Sometimes articles tell you more about the critic than anything he has written.

I wonder how much envy and liberal bias affect some of the reporting. 

[TwoCitiesCapital]

On 11/14/2023 at 10:12 AM, ValueArb said:

 

This is the kind of BS that is why Ray is viewed as a joke.

 

Is it though? The same guy said Ray outperformed all the other managers in their pension. Hard to really say too much about that without knowing who the other managers were, but it seems like it worked. 

 

The idea of an overlay, or "portable alpha" in Bridgewater parlance, is well accepted in the industry. Other shops do this too - it's not just a Bridgewater concept. 

 

PIMCO has one of the best, if not THE best, performing equity mutual fund (StocksPlus Long Duration fund). The strategy is simply buying TRS on the S&P 500 and investing the collateral in actively managed bonds to outperform the funding rates. I.e. you have equity beta and the "portable alpha" came from the fixed income management return above the cost of funding rates + the spread to the bank. You can do this with any asset class that has swaps/futures. 

 

And it works - even at what appears to be the bottom of the worst 3-year returns for long-duration fixed income, PSLDX has beaten the S&P 500 by ~2.7% per annum, net of fees, over the last 15-years despite interest rates being near 0% for most of that time. How much more do you think it works starting off at 5-7% rates for the long duration portfolio? 

Edited November 16, 2023 by TwoCitiesCapital

[ValueArb]

39 minutes ago, TwoCitiesCapital said:

 

Is it though? The same guy said Ray outperformed all the other managers in their pension. Hard to really say too much about that without knowing who the other managers were, but it seems like it worked. 

 

I don't know how much Ray outperformed if Pure Alpha only averaged 1.5% a year from 2012 to end of 2022.

 

39 minutes ago, TwoCitiesCapital said:

 

The idea of an overlay, or "portable alpha" in Bridgewater parlance, is well accepted in the industry. Other shops do this too - it's not just a Bridgewater concept. 

 

I feel Portable Alpha is well accepted as a marketing tool for investment managers and derivative sales people, but I don't accept it as an actual good investment strategy. It got crushed for years after the GFC for example. I find any theories based on CAPM to lack rigor or application in the real world, where risk is not volatility.

 

39 minutes ago, TwoCitiesCapital said:

 

PIMCO has one of the best, if not THE best, performing equity mutual fund (StocksPlus Long Duration fund). The strategy is simply buying TRS on the S&P 500 and investing the collateral in actively managed bonds to outperform the funding rates. I.e. you have equity beta and the "portable alpha" came from the fixed income management return above the cost of funding rates + the spread to the bank. You can do this with any asset class that has swaps/futures. 

 

And it works - even at what appears to be the bottom of the worst 3-year returns for long-duration fixed income, PSLDX has beaten the S&P 500 by ~2.7% per annum, net of fees, over the last 15-years despite interest rates being near 0% for most of that time. How much more do you think it works starting off at 5-7% rates for the long duration portfolio? 

 

PSLDX has done great for 15 years (even after giving back a lot during the last 3 years). So there is one clear winner at the Portable Alpha game. But history rhymes not repeats. If its still crushing 5 years from now it will then have the problem of will it be able to handle all those inflows since no one will ever want to own just a raw index anymore?

[Gregmal]

4 minutes ago, ValueArb said:

 

I don't know how much Ray outperformed if Pure Alpha only averaged 1.5% a year from 2012 to end of 2022.

 

 

I feel Portable Alpha is well accepted as a marketing tool for investment managers and derivative sales people, but I don't accept it as an actual good investment strategy. It got crushed for years after the GFC for example. I find any theories based on CAPM to lack rigor or application in the real world, where risk is not volatility.

 

 

PSLDX has done great for 15 years (even after giving back a lot during the last 3 years). So there is one clear winner at the Portable Alpha game. But history rhymes not repeats. If its still crushing 5 years from now it will then have the problem of will it be able to handle all those inflows since no one will ever want to own just a raw index anymore?

There’s also this kinda of mafia level “wink, wink” understanding in the pits of the institutions managing OPM where they all promote certain things…mainly there own safety and security versus the quality of the product they deliver. I would almost certainly guarantee that most of these guys would even agree that the way they manage OPM isn’t the way they would manage their own; unless of course, managing their own came with a PE like performance enhancer via fees generated from outside capital. 
 

So yea, it’s 100% designed for and by institutional managers. The guys getting paid huge salaries and fees, the fund of fund guys, etc, none of this stuff is designed to actually optimize returns.

[Spekulatius]

Seems to me that Ray Dalio ran a huge business very successfully so he must have done a few things right, be it salesmanship, macro calls, hiring the right employees or something else.

His book "Principles" which I tried to read as a pdf is terrible imo and I don't recommending wasting time it.