会员登录
会员注册来源：2009年3月号《财富》杂志
Bridgewater founder Ray Dalio's intense focus on principles helps him make money in good times and bad. Now he's bracing for some very tough times indeed.
By Brian O'Keefe
(Fortune Magazine) -- Is the current downturn merely a severe slump, or are we facing a second coming of the Great Depression? That's the question everyone is asking these days. But Ray Dalio, founder of Bridgewater Associates and manager of what is now the world's biggest hedge fund, has been preparing to answer it for eight years.
In 2001 he had his investment team build a "depression gauge" into the firm's computer system, line by line in the code, to adjust the portfolio's strategy and risk profile if the economy ever entered a massive deleveraging period - the kind of multiyear process that ricocheted through the world economy in the 1930s and that has eviscerated markets periodically through the ages.
On Sept. 30 of last year, just a couple of weeks after the failure of Lehman Brothers, Dalio logged into his system and saw that the computer had flipped the switch. Bridgewater's black box is now operating on high alert.
Yet even as he is preparing his clients to hunker down for something different and more challenging than a typical recession, Dalio still expects his fund to thrive. Because his approach doesn't depend on the direction of any particular market, he explains matter-of-factly, there is no reason that he shouldn't continue to find as many good investment opportunities as he always has. Considering what he sees coming, that's a pretty bold statement.
In normal times we might be writing about Ray Dalio, 59, simply because he's one of the world's most successful investors. Since starting Bridgewater Associates out of an extra bedroom in his Upper East Side Manhattan apartment in 1975, Dalio (pronounced Dally-o) has built the firm into a powerhouse managing some $80 billion. With a personal fortune estimated at more than $4 billion, he ranks as one of the wealthiest residents even in money-soaked Greenwich, Conn.
More impressively, for the past 18 years his flagship hedge fund, Pure Alpha, which now holds more than $38 billion, has averaged an annual return of 15% before fees - gliding through the Asian flu of the 1990s, the dotcom implosion, the terrorist attacks of Sept. 11, 2001, and the current worldwide financial crisis without ever suffering an annual loss greater than 2%. Last year, when 70% of hedge funds lost money and the average fund fell 18%, Pure Alpha generated a gross return of 14%.
But these are not normal times. And what makes Dalio compelling is not just his track record but the way he goes about making money, and the rigorous analysis he applies to understanding markets, organizations, the economy, and life.
Does Dalio think of himself as one of the world's great investors? "No," he says, shaking his head, visibly agitated. "First of all, I don't know what the definition is of 'one of the great investors.' It's a totally irrelevant question. I have the fear of messing up. And that fear drives me to ask, 'Well, could this thing happen? Could that thing happen? If it happened in Japan, how do I know it won't happen to me?'"
Dalio describes himself as a "hyperrealist," in the sense that he is driven to understand the processes that govern the way the world really works, without bringing subjective value judgments into the equation. "I think the thing that makes him different is an intolerance for the inadequate answer," says Bob Prince, 50, Bridgewater's co-chief investment officer, who's been with the firm since 1986. "He'll just keep peeling back layer after layer to get at the essential truth."
In every activity in his life - from managing his firm to stalking a wart hog on a bow-hunting trip - Dalio believes in applying a carefully thought-out process to get the results he wants. That's especially true in making investment decisions. "I'm very big on having clarified principles," he says. "I don't believe in being reactive. You can't do that in the markets effectively. I can't. I need perspective. I need a game plan." To develop one, he stress-tests strategies through computer simulation across time and around the world to make sure that they're "timeless and universal." It's all about cautious - and highly educated - wagering on probabilities.
During the long boom, many hedge fund managers earned billions on big leveraged bets that stocks would rise; later, a handful made fortunes by anticipating the bust. That not Dalio's style. (In fact, he hates being called a hedge fund manager.) For one thing, he doesn't magnify his bets with a lot of borrowed money - his leverage ratio is about 4 to 1, far less than other investors have used.
Like fellow quant-minded managers D.E. Shaw or Jim Simons of Renaissance Technologies, Dalio translates his insights into algorithms and then has a powerful computer system scour dozens of markets around the world looking for mispriced assets and other opportunities. Rather than focusing only on stocks and searching for Peter Lynch's proverbial "10-bagger," Dalio and his computers concentrate heavily on the currency and fixed-income markets, grinding out consistent singles, doubles, and occasional triples. That approach, as we've seen, can be very rewarding.
Understanding the 'D-process'
Bridgewater's main office is an unobtrusive, three-story stone and glass building that sits on 22 acres of heavily wooded land in Westport, Conn., some 20 miles up the coast from Greenwich. The firm has added space in three other buildings around the area as the explosive growth in its assets under management - averaging more than 40% annually for the past 10 years - has necessitated a similar investment in new employees and technological capacity. Since 2000 its headcount has grown from just under 100 to about 800, with more than 100 people in its client services division alone.
Unlike a typical hedge fund, Bridgewater does not manage money for wealthy individuals. Rather, it works only with large institutions like pension funds and sovereign wealth funds. Right now the firm has 270 clients, about half in the U.S. and half overseas. Like a standard hedge fund, it charges a management fee of 2% of assets and 20% of profits.
But its relationship with its investors consists of much more than taking a cut of their money. Bridgewater's army of analysts provides clients with a stream of research. "I love their daily economic report," says Loews Corp. CEO Jim Tisch. "For me it's a must-read." And the analysts are always on call to perform custom jobs or offer a portfolio critique - even of allocations to other hedge funds. "I view them more as a partner than a vendor," says John Lane, the director of Eastman Kodak's $7.5 billion pension portfolio, which has had money with the firm since the late 1980s. "We don't make a major change here in strategy without calling Bridgewater to get their view."
The money-management industry has been battered by scandal and failures lately, but Lane has complete confidence in Bridgewater. "Of all the investment firms we work with," he says, "they're the most trusted." Asked head-on about the trust issue, Dalio points out that outside custodians hold customers' money and that his institutional clients aggressively audit Bridgewater's operations.
Dalio, a sturdy six-footer who favors open-collar cotton shirts and corduroys when he's not meeting with clients, works out of an unostentatious office brimming with photos of his wife and four children and has a view of the Saugatuck River, which flows through the property. The rustic feel of his surroundings pleases him. A member of the board of the National Fish and Wildlife Foundation, he's an avid fisherman and bow hunter who has gone after everything from Cape buffaloes to wild boars. He says that his attraction to outdoor activities - he also enjoys snowboarding - is primarily a manifestation of his appreciation for the beauty and sophistication of nature. By comparison, he says, "anything that man sees or does is overly simplistic."
To maintain his mental energy and creativity, Dalio meditates about five times a week for 20 minutes, a practice he says he adopted when "the Beatles started doing it in 1968." He is also a rabid music fan with omnivorous tastes. He keeps a box at the opera in New York City, makes an annual trek to New Orleans for Jazzfest, regularly goes salsa dancing with his wife, and has a passion for the blues.
Like many billionaire money managers, Dalio has his own charitable foundation. For the past three years, he's funded newspaper and radio ads supporting a campaign called "Let's Redefine Christmas," which challenged people to give donations to charities as gifts instead of indulging in the holiday ritual of conspicuous consumption.
Although Dalio says he is not a particularly big reader, these days his desk is piled high with some 20-odd books on economic debacles, such as "Essays on the Great Depression" by Ben Bernanke and "The Great Crash of 1929" by John Kenneth Galbraith. Inside each are Post-it notes and hand-scribbled thoughts in the margins. He also keeps close at hand a binder he's put together with detailed, 100-page timelines of the four major deleveraging episodes of the past century - the hyperinflation of the Weimar Republic in the 1920s, the worldwide crash during the Great Depression in the 1930s, the Latin American debt crisis of the 1980s, and Japan's lost decade of the 1990s. He says the timelines provide "a virtual experience of what it would be like to trade through each scenario."
Out of those four historical examples, Dalio says that our current situation most closely resembles the Great Depression because of the global breadth of the problems. But he doesn't like to use the term "depression." He thinks it's too scary, evoking as it does images of hobos and Hoovervilles, and distracts people from focusing on the mechanics of what is going on. He prefers to use a term he coined: "D-process."
Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both.
In recent years the level of debt as a percentage of GDP in the U.S. has skyrocketed past previous highs last seen in the early 1930s. And the Federal Reserve's benchmark rate is now hovering just above zero. To Dalio, therefore, it's clear that a D-process is under way. "It seems very likely that stocks will get materially cheaper," he says. "We have to go through an important debt restructuring process, and a lot of assets are going to be for sale, huge numbers of assets. And there's going to be a shortage of buyers."
Even investors in most hedge funds won't be immune. According to research by Bridgewater, the hedge fund industry in aggregate is 75% correlated to the S&P 500, an issue on which Dalio has been sounding an alarm for a couple of years now. "Too many people have a systematic bias toward positive economic growth," he says. "I think that what we're going to probably have is an economy that's going to get worse, with most people positioned for it to be better." By the end of the D-process, he expects that the reverse may well be the case.
Alpha returns
Dalio grew up in suburban Long Island, N.Y., the only child of a jazz musician and a homemaker. Unlike his father, who played clarinet, piccolo, flute, and sax, Dalio never had the patience to learn an instrument. As a boy in the early 1960s, he caddied at a nearby golf course. The stock market was booming at the time and, at age 12, Dalio heard enough hot tips that he decided he wanted to get in on the action, so he went to see his father's broker. When his first purchase, Northeast Airlines, took off, he was hooked.
After attending Long Island University, he got an MBA at Harvard, spent a year as the director of commodities trading at brokerage Dominick & Dominick, and ended up working under Sandy Weill at CBWL Hayden Stone, where his job was to help businesses hedge their market risks using futures. After a year he struck out on his own as a consultant, helping companies hedge interest rate and currency risk. On the side, he invested his own money and began to accumulate trading "decision rules" - at first jotted down on notebooks, later stored on computers - that could be back-tested to see whether they worked in different eras and markets. In the mid-1980s, he parlayed his reputation for quality research into a chance to manage $5 million of fixed-income money for the World Bank, and produced spectacular returns. He launched his hedge fund portfolio in 1990 with money from Loews Corp. and Kodak.
It's no accident that Bridgewater's flagship fund is called Pure Alpha. The name reflects Dalio's commitment to an approach to investing - "portable alpha," or the separation of so-called alpha and beta - that was innovative when he started but is commonplace today in the wonkier corridors of Wall Street. "Ray Dalio recognized that the traditional model of portfolio construction was too constrained," says Angelo Calvello, a former executive at State Street Global Advisers and Man Investments and the author of a number of publications on portable alpha. "He really changed the way that people thought about investing and allocating risk."
In investing terms, beta is the passive return that a portfolio might get from the ups and downs of a benchmark such as the S&P 500 stock index. Alpha is the measure of a manager's return, with the same risk, in excess of the beta. For his own fund, Dalio devised an "alpha overlay" approach that allowed him to allocate a certain amount of capital to replicate an investor's chosen benchmark and then roam free among other asset classes looking for the best possible "alpha streams," or return opportunities. It was the perfect way to employ the trading formulas he had been accumulating over the years.
Then, Dalio says without irony, he discovered the holy grail of investing, "by which I mean that if you find this thing you will be rich and successful in investing." This grail is not, unfortunately, a talisman that a regular person might stumble on, but a formula: 15 or more uncorrelated return streams, either betas or alphas. According to Dalio, such a portfolio reduces risk by 80%.
The tricky part, of course, is finding a large number of reliable, uncorrelated, moneymaking sources of alpha in the first place. (If it were easy, everyone would do it). And it requires venturing far beyond the bounds of equities. Today, Bridgewater's computers scan the world for opportunities in roughly 100 different categories, ranging from directional bets on the price of industrial metals to relative bets on pairs of emerging market countries' interest rates. Having the fund so widely diversified reduces the risk of a major blowup - and it limits the impact that Pure Alpha can have on any one market.
Bridgewater's confidence in the Pure Alpha system is so great that a couple of years ago Dalio did something rare on Wall Street - turn away money. By the end of 2005, Dalio and his team felt that they were reaching the limits of their investment capacity. They decided it was time to stop taking new accounts and focus exclusively on their best strategy. Much of the money they were managing was segregated into portfolios for, say, global bond exposure using a more traditional approach, rather than Pure Alpha. So they gave their clients the opportunity to either transfer their money to Pure Alpha or withdraw it, if the portable alpha approach didn't fit their institutional mandate.
In the end Bridgewater did lose a few clients but created room to add more money from its existing ones. These days, in addition to the $38.6 billion in the Pure Alpha fund, Bridgewater has $17.9 billion in a portfolio called All-Weather, which Dalio originally created for his family trust. All-Weather is a "passive" fund designed to provide a long-term return comparable to that of a 60/40 mix of stocks and bonds, but with less risk (last year it was down 20%). For investors willing to take more risk, there is also a Pure Alpha II fund that makes the exact same bets as the flagship but with half again as much volatility.
'Either a cult... or the happiest place on earth'
A couple of years ago, Dalio surveyed his rapidly growing firm and decided that he needed to codify his value system so that there would be a model for working and managing the Bridgewater way. So he sat down to write an outline of his principles. The result is an extraordinary 62-page document that every employee is required to study. (Sample tidbit: "At Bridgewater people have to value getting at the truth so badly that they are willing to humiliate themselves to get it.")
"If you took five organizational psychologists, locked them in a room, and told them to create the perfect blueprint for a corporate culture, this is about what they would come up with," says Bob Eichinger, a retired consultant who has spent five decades working with companies on how to manage talent and now works part-time for Bridgewater. "He's trying to design a culture in which people with talent have the freedom to perform."
The result of that design feels pretty radical compared with the typical corporate environment. In keeping with his identity as a hyperrealist, Dalio is committed to total transparency. So, for instance, every meeting is taped and kept on file. Blunt and frequent feedback is required, including "drill-down" sessions that probe into why employees failed at tasks. Managers aren't allowed to evaluate an employee's performance unless he or she is present. Because Dalio believes mistakes are valuable learning tools, every time something goes wrong employees are required to file a memo in the so-called Issues Log. And because Dalio is passionate about the meritocracy of ideas, subordinates are encouraged to argue with their superiors - and the superiors are required to encourage it. "We hate egos," he says.
If young employees - and loads of recent Ivy League grads with 99th-percentile SAT scores roam the halls - need a reminder of the potential opportunity afforded by that meritocracy, they need look no further than Greg Jensen, 34, the head of research and the third voice, along with Dalio and Prince, in the firm's weekly investment strategy meetings. Jensen started at Bridgewater as an intern directly out of Dartmouth and rose quickly through the ranks. "I love that your contribution here gets evaluated on a logical, principled basis rather than through the prism of a power base," he says.
Not surprisingly, the intense culture is not for everybody. "It's either a cult with mind control or the happiest place on earth, depending on whether you buy into it," says one former employee. Even some happy current employees say that there was an initial adjustment period and admitted that aggressively candid feedback wasn't always fun. But several spoke of how empowering such an open approach can be, and a few even offered testimonials for how embracing a policy of radical clarity had improved their personal lives.
More to the point, perhaps, is the fact that Dalio's system gives him the results he's looking for. He says he is perfectly comfortable having his assertions challenged at all times. In fact, he craves it. "I draw my conclusions," he says, "and I say, 'Please shoot holes in this. Tell me where I'm wrong.' People tend to think that my success, or whatever you want to call it, has been because I'm a really good decision-maker. I think it is actually because I'm less confident in making decisions. So in other words, I never know anything really. Everything is a probability."
And that's what keeps him alert to ever-changing conditions. "If I had to make lots of long-term bets, my track record would be much worse than it is," he says. "The beauty of my position is that I have the ability to change my mind tomorrow."
REPORTER ASSOCIATE Doris Burke contributed to this article.