Hard investor: how ray Dalio has created the largest hedge Fund in the world

In late July, The New York Times published a scandalous article with the intriguing title “Sex, fear and surveillance in the largest hedge Fund in the world.” The newspaper told about the complaints to the authorities by employees of the hedge Fund Bridgewater Associates, managing assets of more than $150 billion Employees complained about the oppressive atmosphere in the company — everything that happens in the office, shall be video and audio, there are cases of sexual harassment and attempts to hush up the incident using the pressure of top management.

In the end, the head of Bridgewater Raymond (ray) Dalio had to speak publicly with an explanation which showed that the article “distorted reality” and the journalists of the New York Times didn’t even try to understand how the company works.

Dalio’s personal fortune Forbes magazine estimates at $15.9 billion — an online ranking puts him on 24-e a place among billionaires of the USA and the 57th in the world. In its 67 years, Dalio has been practicing transcendental meditation, and gives advice to governments and the largest companies. As at the end of 2015 Dalio, according to the authoritative ranking LCH Investments, the Manager is the most successful hedge funds in history, Bloomberg Markets magazine included him in its list of the 50 most influential people. In 2015, the remuneration Dalio made $1.4 billion.

Boy with Golf course

The future billionaire ray Dalio was born in 1949 in the new York borough of Queens. His father was a jazz musician and played clarinet and saxophone in the night clubs of Manhattan, and his mother was a housekeeper. When ray was eight, his family moved to a suburb of new York- the small town of Manhasset.

In childhood, Dalio harbored a great love for learning the school routine and the constant grind it weighed. But even then, you couldn’t call him lazy: Rey since childhood, he earned himself pocket money, in the winter removing snow from neighboring areas, and in the summer cutting lawns. One of these children’s part in the end played a big role in all of his future business career.

In 1961, when ray was 12, he takes a job at a trendy Golf club Links Golf Club, located near his home. His responsibilities included the migration of sports equipment and tips to the players, many of whom were investors on wall street. Dalio himself in the conversation for the 2012 book The Alpha Masters, dedicated to the Manager of the largest hedge funds, says that at that time one of the most popular topics of conversation was the stock market about stocks talked everything from hairdressers to Shoe-shiners. The teenager was interested in this topic, began to study The Wall Street Journal and ask advice from members of the Golf club from among the investors. Having accumulated $300, Dalio began his first selection of attachments that had to meet a simple criteria: the shares must be owned by the company, which he heard something, and cost less than $5 per share. In the end the choice fell on the shares of airlines Northeast Airlines. The investment has been successful — the company has received a proposal regarding a merger, and its shares rose three times. “Investing seemed to me to be a fairly easy task — I looked at the names of the companies and thought I just have to pick those stocks that will go up. If this hadn’t happened I would have lost money, I could now do something else” — says Dalio.

Encouraged by its first success, Dalio begins to spend hours studying reports, leading companies and accumulating a portfolio. As a result, by the time of graduation in order Dalio had a stock portfolio for a few thousand dollars.

Meditative investments

In 1967, Dalio goes to College at long island University, where he studied Finance. Like most young people of that time, Dalio likes rock music, including the Beatles. After their idols, he begins to practice transcendental meditation, which continues to this day. Much later, already being the owner of a multibillion-dollar fortune, he will say that his success is due primarily to transcendental meditation, which “taught him to see things in perspective.

Dalio is one of the best students at College and after his graduation in 1971, enrolls in Harvard business school. Studying again is given to him is easy: as explained himself Dalio, Harvard didn’t have anything to learn why he’s so disliked. In the summer of 1973 Dalio tries his hand at stock trading in raw materials (grain, oil, cotton) in Меrrill Lynch. Then the trade in raw materials was on the sidelines compared to stock trading. However, the situation changed in the autumn of 1973 after the first oil crisis. Dalio, together with Harvard friends decided to establish a company specializing in trading raw materials, choosing for it the name of Bridgewater Associates. However, this business has brought new traders significant results.

After graduating from Harvard Dalio joined the brokerage company Shearson Hayden Stone, led by the future founder of Citigroup Sanford Weill. Dalio worked in the Department of commodities, giving advice on hedging risks (as a reminder of those times, in his office still hanging gift California farmers bull — horns). However long Dalio this place did not last. On the eve 1975, he went to the bar to drink with his boss, between them a dispute ensued, and Dalio hit your boss, with the result that he had to resign. From this moment begins the story of Dalio as an independent businessman.

Alpha and beta

After the dismissal of Shearson Hayden Stone 26-year-old Dalio has convinced several of his clients to hire him as a consultant on risks and investments. He founded the company Bridgewater Associates, borrowing the name of his first business. The first company office was in new York one bedroom apartment Dalio. The first ten years of its existence, the company operated solely as a consulting business. Over time, Dalio was able to establish itself thanks to the deep macroeconomic analysis. It is sent out to clients titled “Daily observations” (Daily Observations) become popular and influential in the market.

Among the clients of Dalio in the period was McDonald’s — in 1983, the company turned to a consultant to develop a variant of a futures contract for the delivery of chicken that was needed for the new dish — Chicken McNuggets.

First, who entrusted their funds to the management of Bridgewater Associates, in 1985 became the company Strategic Investment Group. Its President Hilda Ochoa-Brillembourg in a Financial Times interview about Dalio says that he has the talent to hear the signals of the market and know when it’s just noise, and when they are added to the music.”

The first major client came to Dalio in 1985 — he was in control of $5 million from the pension Fund world Bank staff (senior officials of the world Bank for years before that regularly read “Daily observations”). Some time later, Dalio persuaded the world Bank to give him more freedom to diversify investments. The strategy implied a departure from the traditional practices of asset managers who have tied their actions to the pre-formed standard investment portfolio. Dalio sought to more active management. After the pension Fund of the world Bank to the clients of Bridgewater joined the pension Fund of Kodak.

Innovative approach Dalio partly lies in the fact that his Foundation is fundamentally a preference for working with large organizations, not wealthy private investors. In assets under management, Bridgewater associates, approximately one third accounts for corporate pension funds, and about a quarter the means of sovereign funds. Dalio himself in the book The Alpha Masters says that he prefers to deal with “smart client”, which not only trusts him money, following blind faith, but to “engage in dialogue” with the hedge Fund.

The growth in the number of customers grew and the scale of investment — Dalio used a global macro strategy by investing worldwide in different assets, while conducting in-depth retrospective analysis of a particular market.

Bridgewater Associates running Dalio became the first hedge Fund, which built its strategy on a clear separation of the two classes of return — alpha and beta. Alpha is the profit that an investor receives as a result of the ability of the Manager to know in advance which assets will increase in value and which will fall (yields will thus be higher than the total return on the market). Beta, by contrast, is tied to the overall profitability of the market and less risk. Running Bridgewater Associates was established two structures, specializing on two different types of return is Pure Alpha and All Weather respectively. In All Weather, the investors pay the Manager less money, but the yields are lower. Pure Alpha eventually became the flagship division of the Bridgewater — according to estimates by LCH Investments, for all time of existence of Pure Alpha earned $45 billion, since 1991, only three times after finishing the year with a loss.

The success of Bridgewater is largely based on the unprecedented level of analysis that the Foundation holds. So, on the eve of the global financial crisis since summer 2007, in its analytical summary of Dalio and his co-author called “insane” practice of issuing loans and the level of debts of large banks. In search of precedents Bridgewater studied previous occasions credit crises, until the 1920-ies. The company Dalio has estimated that possible losses of banks from bad debts will amount to $839 billion From these calculations, Dalio visited the U.S. Treasury and the White house, but his warnings were unheeded. In the spring of 2008 Bridgewater withdraw funds from several troubled banks, including Lehman Brothers and Bear Stearns. Due to the fact that Dalio was able to foresee the crisis, Bridgewater became one of the few in the industry who managed to remain profitable during the crisis years. The hedge-Fund makes a profit in 2008 and in 2009. And in 2010 became a record for the company — Fund assets increased by $15.3 billion In 2011, the portfolio of Bridgewater Associates was 23%, while the average portfolio of other hedge funds have made a loss of 5%.

Financial guru

As head of the world’s largest hedge Fund, Dalio is respected in the expert community. At times he shares with the world his vision of the economic situation, posting videos with their comments on the website economicprinciples.org. On the Bridgewater channel in YouTube he posted the video (currently with over 3 million views), which describes “how the economic machine works”. According to him, this concept helps him to anticipate the global crisis. In the final video it displays three basic rules: don’t allow debt to grow faster than income, not to allow debt to grow faster than productivity and do everything possible to increase the performance.

Giving tips to novice investors in the conversation for book Money. Master the Game, Dalio described the perfect investment portfolio. 30% this portfolio consists of stocks from the S&P 500 index, 55% for the state bonds (40% of them are long-term and 15% to medium). According to Dalio, such a large percentage of bonds needed in order to compensate for the volatility of the stock. The remaining 15% of the portfolio Dalio distributes equally between gold and other commodities (in the case of inflation). In case if some of the segments shows a high yield, it is necessary of the funds of this asset can move to other segments — such rebalancing must be done at least once a year. Dalio emphasizes that the division of investments equally between stocks and bonds is quite risky and unsustainable investment. According to him, the degree of risk in this distribution is not less than 95%, since the shares subject to high volatility.

Sometimes examination Dalio attract and at the state level. In may 2014, Dalio visited Russia, where he participated in a meeting with officials of the financial-economic bloc of the Russian government. In October of the same year, the hacker group “Anonymous international” has published recommendations Dalio to revive the Russian economy. From documents follows that Dalio encouraged Russian officials to increase the role of financial markets and domestic debt in national currency (according to Dalio, the growth of debt needs to be comparable to GDP growth). The investor also proposed to borrow funds for economic development from pension funds and insurance companies.

Business ray Dalio in numbers

$154 billion assets under management at Bridgewater Associates

$82.3 billion in assets managed by the hedge Fund, Pure Alpha

18% — the average annual yield of Pure Alpha since 1991

1.7 million people — the number of employees of Bridgewater Associates

$3.3 billion profit Pure Alpha in 2015

Source: company data, LCH Investments

The cult of personality

Hedge funds are a rather closed industry in terms of information on internal orders and corporate culture. Dalio himself often repeats that Bridgewater Associates, the spirit of “radical openness” — in his words, employees can Express their dissatisfaction with a particular issue, and the case company is to understand they are right or not. In an interview with The Wall Street Journal investor likened the beginning of the work in Bridgewater with entry into service in the U.S. special forces.

The process of applying for a job in Bridgewater is really reminiscent of the selection of the elite troops — the candidate undergoes six different types of tests, the purpose of which is to study his personality. After receiving the staff needs to evaluate each other’s work through a special application Dots. Dalio expects from employees that they will openly criticize each other’s work. Following is a detailed analysis of the problem (such processes are one of the insiders in the company compared with the Spanish Inquisition). All this gave New York Magazine a reason to call Bridgewater “multi-billion dollar experiment to study human behavior.”

Kind of a corporate code in Bridgewater are “Principles” by ray Dalio — consisting of more than 200 points 110-page document, which spelled out guidelines for behavior in the team. In the document in several places it is emphasized that mistakes in the team needs to personifitsirovano: the behavior in the team is compared to the behavior of hyenas, which eat the predator, but in the end redound to the benefit of the system, helping the process of evolution.

The July article in The New York Times that cast a shadow on the image of Bridgewater reported on the complaint of one of employees of the company to the Commission on human rights of Connecticut. In his complaint, 34-year-old Christopher Tarui called Bridgewater “the cauldron of fear and intimidation.” He described an atmosphere of constant video and aedificatio actions of employees and also uncovered a case of sexual harassment on the part of his head-men. After Tarui filed a complaint, according to him, several top managers of Bridgewater began to put pressure on him, demanding to withdraw the charges. In the publication NYT notes that complaints to the National Directorate of labour relations was filed by seven former employees of Bridgewater.

In its response to the publication of the NYT Dalio said that the newspaper had made in his article distortions and inaccuracies. “Bridgewater is not a “cauldron of intimidation”, but quite the contrary. The company is a well known fact that gives its employees a voice, especially when talking about problems”. The need to record the meeting, Dalio explained that it relieves some of the staff need to attend meetings in person. Dalio also denied the information that the company requires all employees at the beginning of the working day switch off cell phones to maintain secrecy. Speaking directly about the subject of the complaint, the investor noted that Bridgewater is struggling with “frivolous charges that are made in the calculation of cash benefits.”

In early August it became known that the Concern has withdrawn the allegations and moved to another company.