The secret of Bridgewater, the world's largest hedge fund

Ray Dario's investment strategy has been a closely kept secret, even within Bridgewater. A few years ago, some of the biggest names on Wall Street began digging into the secret of his success.

Since founding the Bridgewater Fund in 1975 in his Manhattan apartment, Ray Dario is said to have had amazing skills in spotting and making money from global economic or political big picture changes.

For years, these private rumors have been spreading from one trading floor on Wall Street to another.

At its peak in 2022, Bridgewater, a global investment powerhouse, managed $168 billion in assets, making it not only the world's largest hedge fund, but also more than double the size of the second-place fund.

Ray Dario, the billionaire founder of Bridgewater Funds, who is often featured in the financial media, has publicly stated that he has cracked the so-called "holy grail" of investing, which includes a series of trading formulas that are bound to make money, "I mean, if you find this thing, you will become rich and successful." ”

So why doesn't anyone on Wall Street know much about this?

Since founding the Bridgewater Fund in 1975 in his Manhattan apartment, Dalio is said to have had amazing skills in spotting and making money from global economic or political big-picture changes, such as when a country raises interest rates or cuts taxes. This makes sense and makes no sense. Why is Bridgewater better at predicting than any other investor in the world trying to do the same?

Bridgewater is best known for its response to the 2008 financial crisis, when the company's main fund rose 9 percent while stocks fell 37 percent, making Mr. Dalio a sought-after adviser to the White House and the Federal Reserve and attracting new deep-pocketed clients to his firm. However, the hedge fund's overall description of its investment approach can be extremely vague.

Dario often says that he relies on Bridgewater's "investment engine," which is a collection of hundreds of "signals" or quantitative indicators of the market's rise or fall. Bridgewater rarely divulges any details of these signals, citing competitive pressures, but if they indicate trouble or even uncertainty ahead, Bridgewater says it will buy or sell assets accordingly — even though Dario's own instincts may have told him that this is not the case.

This so-called subjugation of basic instincts is at the heart of Mr. Dario's identity and is expressed in his published book, The Principles, which prescribes the doctrine of "total transparency" and lists hundreds of rules on how to overcome the psychology of the individual. (Part of one rule reads: "Not all opinions are equally valuable, so don't treat them that way.") ”）

To the bewilderment of competitors, investors and onlookers, the world's largest hedge fund does not look at all like a Wall Street player. Much smaller hedge funds may influence the market through rumors of one deal or another alone. Bridgewater's weight was supposed to make it the ultimate whale, making waves every time it shifted its position. Instead, the company's footprint is more like a small fish.

If there is no secret, how will the outside world perceive this issue?

Wall Street Investigators

Bill Ackerman is one of Wall Streeters who has questions about how Bridgewater funds make money.

Three people with very different backgrounds took three different approaches to the mystery of how Bridgewater chose its sides.

In early 2015, adamant hedge fund manager Bill Ackerman bore the brunt. The billionaire founder of Pershing Square Capital has long found Mr. Dario's public statements about his quantitative investing style to be general, even meaningless.

At a charity event in February of that year, Ackerman confronted Dario in an interview on stage, asking Bridgewater what it did with the assets it managed.

Dario replied, "Well, I think it's because I can go long or short anything in the world. I'm basically long liquidity. And I can short or long anything in the world, and I can go short or long almost anything. ”

He also noted that about 99% of Bridgewater's transactions are automated under long-undefined rules. "They are my standards, so I feel comfortable," Mr. Dario said.

Ackerman tried another strategy. He gave Dario a "layup", the kind of question that was asked six times an hour on commercial television. "Let's say you want to buy an asset, a stock, a market, or a currency. Where would you put your money? ”

After a pause, Dario said, "I don't do that." He went on to elaborate on how Bridgewater's hundreds of investment employees go about their day, describing a data-driven approach.

On stage, Mr. Ackerman said it was "one of the most interesting conversations I've ever had." But he shook his head and walked away.

"What the hell is he talking about?" He then vented.

Jim Grant, a financial analyst who calls himself a "prophet of reason," watched the interview in amazement. He has a mysterious newsletter, The Grant Rate Observer, which is popular because many serious investors claim to have read it.

Grant has been privately pondering shady issues about Bridgewater for years. He assigned his senior lieutenant to investigate deeply. They disperse widely, scrutinizing the company's public documents and surreptitiously talking to anyone who might know what's going on.

Grant recalled that they were overwhelmed by "all sorts of people blinking and nodding" and that "something was really wrong." In October 2017, Mr. Grant devoted an entire issue of Bridgewater to his publication on the themes of "Distraction, Sycophancy" and "Mystery."

The newsletter claims to have a litany of problems. Shareholders of Bridgewater's parent company, including employees and clients, do not automatically receive copies of the company's financial statements. The newsletter said the five separate Dario family trusts each appeared to hold "at least 25 percent but less than 50 percent of Bridgewater, which seems mathematically difficult."

According to publicly disclosed information, the hedge fund borrowed money from its own auditors, which made the longtime analyst feel unstable and unusual. "We're going to take it all in, Bridgewater isn't going to be around for long," the newsletter concluded.

At 8:30 p.m., the day the report was published, Grant and his wife sat on the couch at home watching the New York Yankees game. When his home phone rang from an unknown number in Connecticut, Grant transferred the call to voicemail. It wasn't until about half an hour later that his wife heard a beep in the distance. She walked over and pressed play on the machine, putting the message on the speakerphone. Dario's voice sounded cautiously and calmly:

According to Grant, "I'm not sure you've seen the latest installment of Grant." Dalio's phone call, which lasted almost half an hour, detailed his complaints about the article.

Jim Grant devoted the entire newsletter to investigating Bridgewater.

The following week, Grant spoke intermittently with a number of Bridgewater executives. He realised he had made some key mistakes with regard to the fund's regulatory filing and audit relationships. Grant called CNBC to apologize, but Grant said overall, he was still confused about "how the company actually does business."

All this piqued the interest of Boston financial investigator Harry Markopolos, who was still an unknown analyst in the late 90s of the 20th century, when his boss asked him to copy a competitor's trading strategy, which seemed to be paying off handsomely. Marco Polos couldn't do that, but he got it, so he started talking to the SEC. Six years later, when his warning to Madoff proved correct, Mr. Marco Poulos earned national fame.

According to people who work with Marco Polos, what happened in Westport, Connecticut, where Bridgewater is headquartered, raises serious questions. There's another giant hedge fund here, with an investment approach that no competitor seems to be able to understand. He obtained Bridgewater's marketing documents, including a summary of the company's investment strategy and a detailed chart of the fund's performance.

Bridgewater describes itself as a global asset manager, but the documents do not list any specific assets that have contributed or lost money to the company. Investment performance charts show that the company has rarely had a year of decline — and even if Mr. Dalio's public predictions are confirmed, Bridgewater's main fund, Pure Alpha, appears to have been flat at the end of the year.

As Marco Polos flipped through the papers, he felt a familiar throbbing in his heart.

According to three members of Marco Polos' team, his team spoke with Texas-based hedge fund manager Kyle Bass, who is known for predicting ahead of time that the subprime mortgage market would collapse in 2008. Mr. Bass told colleagues that he had always wanted to know how Bridgewater was traded.

Marco Poulos also visited Greenlight Capital's David Einhorn, a hedge fund billionaire known for spotting fraud. Einhorn welcomed Marco Poulos to his Manhattan office and sat down with a team of Greenlight analysts who Mr. Einhorn said were interested in investigating Bridgewater for themselves, two people present recalled.

Einhorn said after listening to Marco Poulos' speech that this was also in line with his suspicions.

That's the encouragement Marco Polos needed.

In a letter to the SEC, he wrote that Bridgewater was a Ponzi scheme.

Circle of Trust

The SEC and other regulators dutifully held meetings with Marco Polos and his team. The whistleblower's report was passed through the organization, which was investigated by a team from the agency. (The Securities and Exchange Commission declined to comment.) ）

According to a person with knowledge of the investigation, they have come to the conclusion in part that the world's largest hedge fund uses a complex array of financial machinations — including relatively hard-to-track trading instruments — to make deceptively simple investments. This makes sense for the SEC. Competitors can't track them.

The SEC is satisfied with this. Stop responding to Marco Polos and his team's requests for updates. Regulators have not made public allegations against Bridgewater.

As it turned out, by the time the SEC received Marco Poulos' opinion, regulators had opened an investigation into Bridgewater. In the wake of the Madoff fraud, the SEC never really delved into the world's largest hedge fund. The SEC doesn't care too much about how Bridgewater makes money, it's just that it does invest in clients' accounts.

Marco Polos filed the SEC's whistleblower report on Bridgewater, which earlier earned national fame after his warning against Madoff was proven correct.

In fact, very few people at Bridgewater are involved in the day-to-day hedge fund money-making work.

At its peak, Bridgewater had about 2,000 employees, as well as hundreds of temporary contractors, less than 20 percent of whom were allocated to investments or related research areas. (The rest are responsible for operational tasks, including expanding on Mr. Dalio's "principles.") ）

Many of these investors take on responsibilities that are no more complex than those of the average college student. They work on economic history research projects and write essays, which are reviewed and edited by Dario.

Current and former investment employees say most research staff know not to ask whether these insights are woven into Bridgewater's deals.

At Bridgewater, only a small group of people (no more than 10 people) enjoyed the "different view". Dalio and his longtime deputy, Greg Jensen, selected a few members of the Bridgewater Venture partners' team and allowed them access to the inner chamber. In exchange for signing a lifetime contract and vowing not to work for another fund again, they will see the inside secrets of Bridgewater.

Mr. Dalio refers to this group as the "circle of trust".

REAL SPECTACLE

There are two versions of how Bridgewater funds have invested hundreds of billions of dollars in the market. Mr. Dalio presented one of the editions to the public and customers. Current and former investment employees say another version is secret.

In the first version, Bridgewater's hedge fund was a model of elitist thinking. Every investor or researcher can come up with an investment idea, and the Bridgewater team calmly discusses its merits, combined with extensive historical research.

Over time, the idea of an investment employee with an accurate forecast track record will have more impact and win the support of more client funds.

Investors flocked to Bridgewater, convinced that Bridgewater, unlike other hedge funds, would not rise or fall in response to a single trade or prediction from the company's founders. This is the equivalent of Darwinism on Wall Street.

Every Friday, Dalio's assistant delivers a thick briefcase full of economic research reports, which are then quickly transported by a driver to Dalio's mansion in Greenwich, Connecticut. This material laid the groundwork for what Bridgewater called the "What's Happening in the World" conference.

Held every Monday morning. Dalio, Jensen and Bob Prince, the longtime co-chief investment officer of Bridgewater, would sit in front of the largest room, where a river meanders around a group of medieval-style buildings. There were rows of staff sitting in front, as well as strange visiting customers who were invited to the show.

Greg Jensen is one of Dalio's longtime deputies and a member of Bridgewater's minority trust circle.

With the recording of the camera so that the rest of the company can watch it later, the people in the room will argue for hours about the big topics of the day. It's a real spectacle.

It's also almost completely unrelated to what Bridgewater is doing with its funds.

After the meeting, the circle of trust will flow into a small corner of the office, and few people in the company can enter, and the real work begins.

Trading Game

There is indeed a so-called circle of trust. But while there may have been more than one person involved in the trade-off, only one investment opinion in the company's flagship fund actually had significant significance, employees said. There are no grand systems, no real AI, no holy grail. Only Mr. Dalio personally called the shots, by telephone, on his yacht, or, for many summer weeks, in his villa in Spain.

Lawyers for Dario and Bridgewater said hedge funds "are not a place ruled by one person, because 98 percent of the time decisions are made by the system." "Mr. Dalio's assertion that Bridgewater is 'calling the shots' is wrong," they said. ”

Dalio is primarily responsible for overseeing the main fund, Pure Alpha, and has developed a series of "if-then" rules. If one thing happens, then another will follow. For Pure Alpha, such an "if-then" rule is that if a country's interest rate falls, then that country's currency will depreciate, so Pure Alpha will short the currency of the country with a falling interest rate.

Many of the rules deal only with trends. They believe that short-term movements may be indicative of long-term trends and depend on the momentum of individual markets.

Bridgewater's rules gave it an unquestionable advantage in its huge success in the late '80s and early '90s, when most people on Wall Street, from junior traders to billionaires, still trusted their instincts for value.

Over time, however, Dalio's dominance waned and seemed to have stopped in the 2010s and this decade. The rise of powerful computers has made it easy for any trader to write rules and trade according to them. Competitors quickly caught up with Dalio's discovery and then overtook them in areas such as high-frequency trading. Dario still adheres to the rules of his history to this day. ("They are eternal and universal," he told one interviewer.) ）

Although Bridgewater's assets under management slowly shrank to less than $130 billion in the post-pandemic period, Bridgewater remains the world's largest hedge fund because it is much larger than any other competitor and willing to raise capital from almost any corner of the planet.

Even though Bridgewater's main hedge fund has lagged global markets for years, it has largely avoided more negative outcomes. So it's fair to say that it makes money for its clients on an absolute basis. Its growth is a testament to the company's marketing prowess, which has earned Pure Alpha a sense of mystery over its hands-off, rules-based approach.

This stagnancy has led Bridgewater to create "trading games" that simulate the real world, in which investors bet their best ideas against a pool of Mr. Dalio's own money. (If the staff's idea wins, they will be paid in cash.) ）

For many in the investment department, this is the only time in their Bridgewater careers that they have been able to actually implement an investment idea.

"Give them a helicopter"

Investors say 2011 to 2016 was a boom time for the market, with Pure Alpha's returns in the low digits, well below historical levels, and the next five years weren't much better.

Dario and Bridgewater went to great lengths to protect this advantage.

On Wall Street, the term "information advantage" often has an inappropriate connotation, implying that someone engages in insider trading. However, Dalio's information advantage is both legitimate and enormous.

The goal of the Bridgewater Fund is information about the country as a whole. According to employees involved in the effort, Dario was a great deal of curry favor with well-connected government officials from whom he could infer how they planned to intervene in the economy — and Bridgewater used those insights to make money in its fund.

Everywhere, it seems to be "fair game", even in Kazakhstan.

Bridgewater has established relationships with government officials in Kazakhstan, the second-largest oil producer in the former Soviet Union.

This Central Asian country does not appear on the first page of any Wall Street manual. It is ruled by an authoritarian government and is the largest landlocked country in the world, but it is sparsely populated.

In 2013, Kazakhstan began developing its most expensive oil project at the time — a huge oil field in the Caspian Sea — helping it build a $77 billion sovereign wealth fund. The money had to be invested somewhere, and Bridgewater's client service team scheduled a meeting on Dalio's calendar with the fund's CEO, Berwick Outmurat, a bureaucrat whose career began just a decade ago.

Dario showed great interest in the delegation. "What were they doing before?" He asked Bridgewater's marketing team.

His subordinate replied that Mr. Otmurat would arrive in New York a few hours before his arrival in Westport.

"How did they get here?" Dario then asked.

Bridgewater arranged for a Mercedes driver.

"Send them a helicopter."

The theatrical entrance was preceded by an unconventional speech, at least in comparison to what Mr. Outmurat went through in New York. There, industry giants such as KKR co-founder Henry Kravis and Blackstone's Stephen Schwarzman took turns flattering him with sea bass, caviar and an orange hazelnut Napoleon dessert themed on the Kazakh flag.

Dalio drew an illegible chart on a dry-erase board and talked aimlessly about the nature of the market. According to a person at the scene, he barely mentioned the specific practices of Bridgewater. It's all about undeniable charm and confidence.

Bridgewater's marketing team has seen this move before. The ultimate goal will not be cash. Therefore, when Otmurat raised the possibility of investing $15 million in Bridgewater's main hedge fund, representatives of the fund rejected the proposal. "We don't want to do this deal with you right now," said one marketing executive. "We're here to fight the long game."

Within Bridgewater, relationships mean visits. The development of new oil fields in the country has taken more than a decade and has been delayed almost constantly. Anyone who knows how the project is progressing can adjust their bets on oil accordingly. Representatives from Bridgewater told the delegation that their firm was happy to provide free investment advice, and that the Bridgewater team was equally pleased with the opportunity to ask questions about the local specialized industry.

Mr. Ottmurat and the rest of the delegation seemed eager to chat.

Soon, Bridgewater was able to take a two-pronged approach. A few months after Otmurat visited Westport, the Kazakh fund again asked if it could invest in Bridgewater. This time, former employees said, it had a pending amount well over $15 million, and Bridgewater agreed.

Dalio's spokesman said all his interactions with government officials were correct.

No one will know

Janet Yellen has kept a greater distance from Dalio than her predecessor.

Upon his return to the United States, Dario's influence was slowly waning. During and after his fame during the financial crisis, he had no trouble reaching out to Federal Reserve Chairman Ben Bernanke. However, Bernanke's successor, Janet Yellen, is apparently less interested in the Bridgewater founder. Dalio often complained to the rest of the company that Yellen didn't return his calls or meet with him.

But Dario continued to achieve greater success abroad. Mario Draghi, who was born in Italy and served as president of the European Central Bank from 2011 to 2019, often chatted with the Bridgewater founder and sought his advice.

Dalio suggested in the mid-2010s that he roll out more stimulus to the EU, which would boost European stock markets and hurt the euro. For most of that era, Bridgewater was also short the euro.

In Zurich, Dalio found the "ear" of the Swiss National Bank. According to a former Bridgewater employee who helped establish the ties, he suggested that the bank work to decouple the Swiss economy from the troubled whole of Europe. In early 2015, when the Swiss National Bank removed the Swiss franc's peg to the euro, Bridgewater's fund made a fortune.

In media interviews, Dalio has been consistent with his praise for the leadership of many countries. He said "very competent" over and over again, sometimes repeating this phrase more than once in interviews. He also said inside Bridgewater that the leaders were quick to turn to him for advice.

Coin toss

Dario's magnificent automation system – his investment engine – is far less automated or mechanized than advertised. If he wanted Bridgewater to short the dollar (as he did for about a decade after the 2008 financial crisis, but it didn't work out), the trade would have gone through. There are no rules more important than what Dalio wants.

As 2017 approaches, some of the top investors think they've had enough. Pure Alpha was up just 2% that year, well below most hedge funds.

In an effort to turn around the company's investment performance, members of the Circle of Trust conducted research on Dario's deals. They delved into Bridgewater's archives to find the history of Dario's personal investment philosophy. The team calculates the data again and again.

According to current and former employees present, they then sat down with Dario. (Lawyers for Mr. Dalio and Bridgewater said they had not commissioned research into Mr. Dalio's deal, nor had they convened a meeting to discuss the issues.) ）

A young employee handed over the results with trembling hands: studies have shown that Dalio is as correct as the error rate.

Trading according to his ideas is often akin to flipping a coin.

The group sat quietly, nervously awaiting a response from Bridgewater's founder.

Mr. Dario picked up the paper, crumpled it up, and threw it out.