Bridgewater’s Dalio prospers with unconventional thinking

September 17, 2011

Bridgewater Associates founder Ray Dalio can rattle off the investing fads he’s witnessed since he began trading as a 12-year-old golf caddie: the Nifty-50 stock craze of the 1970s, the 1980 gold bubble and even the 60-40 stock-to-bond mix.

“Manias occur when there is group thinking,” Dalio says.

Dalio, 62, built Bridgewater into the world’s largest macro hedge-fund firm, with $122 billion in total assets, by tacking against consensus. He’s created a distinct workplace culture and a research-driven investing process that spreads risk across scores of markets.

“Making money is a zero-sum game, so to be successful you have to be willing to stand apart from the crowd,” Dalio says. “And you have to be right.”

The founder was right often enough during and after the worst financial crisis in decades starting in 2008, helping to cement his reputation. Three Bridgewater hedge funds placed among the 100 top-performing large funds in Bloomberg Markets’ annual ranking, including its flagship, Pure Alpha II. The No. 3 fund posted a 38 percent return for the 10-month period through October 2010.

Dalio’s influence spreads beyond his elite industry. He and his colleagues regularly brief central bankers, as well as pension and sovereign-wealth funds, on their outlook. The firm’s newsletter — Bridgewater Daily Observations — is required reading for macroeconomic thinkers for its prescient analysis.

In August 2007, as credit markets were tightening, the newsletter warned, “Hedge funds in general are unlikely to provide much diversification to help protect against poor performance of traditional markets.” The next year, funds lost an average of 19 percent.

“You find insights that are different from what you were thinking,” says Hilda Ochoa-Brillembourg, president of Strategic Investment Group.

At its headquarters in Westport, Conn., Bridgewater devotes a great deal of resources to research. The firm’s 1,200 employees generate data and analysis that inform bets on macroeconomic trends. In June, researchers tracked the percentage of world gross domestic product generated by Western Europe, the United States, Africa, China and other markets to the 16th century to show long-term shifts in economic power.

44.8 percent return

“No one pursues market-based truth more aggressively than Ray,” says Britt Harris, chief investment officer of the Teacher Retirement System of Texas.

In July 2007, more than a year before the bankruptcy of Lehman Brothers, the newsletter cited “pervasive fragility” in the financial system. It noted the 50 percent growth in the notional value of credit derivatives, to $29 trillion, during just the last half of 2006. So Pure Alpha II piled into Treasury bonds, shorted stocks and loaded up on gold. It finished 2008 with a gain of 9.4 percent, investors say.

By 2010, against a forecast of anemic growth in the United States and Europe, Pure Alpha II’s wagers were spread more widely than usual. It made money on developed-market currencies, equities, and emerging-market debts and currencies, as well as commodities. Investors say the fund generated a 44.8 percent return last year. And amid the market turmoil of 2011, the fund is up 25.3 percent through Aug. 31. All told, Pure Alpha II has returned 15 percent annualized since its Dec. 1, 1991, start.

Dalio’s transformational effect on money management dates to the early 1980s. While many investors embraced a simple asset mix of stocks and bonds, Bridgewater spread its bets across myriad markets, eventually to more than 100 of them. The firm wagered on everything from Treasury yield curves to Australian dollars to crude. That diversification, including bets not related to the overall direction of the market, helped the hedge fund prosper in good markets and bad — and it lured huge pensions and other big institutions to an industry then dominated by wealthy families and endowments.

“He created the framework to look at what is happening in currencies, economies, equities and credit markets,” says Michael Rosen, chief investment officer of Angeles Investment Advisors.

Dalio grew up in suburban Manhasset Hills on New York’s Long Island, listening to his father, a jazz musician, play the tenor saxophone. He earned an MBA from Harvard in 1973.

Dalio soon landed at a predecessor firm to Shearson Loeb Rhoades, the brokerage built by Sandy Weill, who would go on to run Citigroup. Dalio chafed at the hierarchical culture and was fired by Weill after about a year.

Dalio started Bridgewater in 1975 in a spare bedroom in his New York apartment. Since then, he has boiled down his thinking into a set of investment principles that he posts on the company’s Web site. Some are philosophical, such as No. 24a: “Ask yourself whether you have earned the right to have an opinion.” Some read like Confucian aphorisms. No. 17: “When you experience pain, remember to reflect.” This year, Dalio changed his title to mentor from president.

Concerns about Europe

He says the principles complement his firm’s effort to be “radically truthful.” Bridgewater employees — Dalio included — are required to publicly talk about their and their colleagues’ mistakes and weaknesses as a means to improvement.

These days, the view from Bridgewater is dour. He divides the world in two: Developed debtor nations that are deleveraging and emerging creditor countries that are leveraging up. After years of overspending financed by borrowing, the former are forced to lower their debt relative to income levels, constraining spending and employment gains.

Developed debtor countries, including Greece, Spain and Italy, that can’t print money to make it easier to service their debts and to make up for slow credit growth will have decade-long depressions and debt defaults.

“We worry about Europe not being able to solve its problems,” Dalio says.

Dalio expects emerging creditor nations to become economic leaders. Countries such as China and India that have currencies and monetary policy linked to those of the United States are experiencing inflationary bubbles because their interest rates are too low, he says. They will have to unlink or face intolerable conditions. Emerging economies will account for 70 percent of global GDP in 20 years, compared with 47 percent now.

Dalio views August’s market turbulence as consistent with Bridgewater’s outlook. “Emerging creditor countries are trading more like blue chips; the U.S. is trading more like a country in decline,” the Daily Observations read Aug. 8.

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