The hedge fund titan discusses his emergence from the shadows into the limelight, comments on current market issues.
Among asset managers, privacy is everything—especially if you’re Ray Dalio, the founder, co-CIO, and former co-CEO of Bridgewater Associates, the world’s largest hedge fund, which manages some $160 billion in assets.
With the exception of a 1982 appearance on Wall $treet Week, where he incorrectly predicted the stock market—an outlook that led to the near foreclosure of Bridgewater—Dalio for the most part labored in obscurity. He details those events leading up to the near dissolution of Bridgewater in chapter three (“My Abyss: 1979-1982”) of his just-released book, titled “Principles,” which was published on September 19. Earlier this year, Dalio stepped down from his co-CEO position at the firm.
Fortunately, Bridgewater did not foreclose, as Dalio, had developed an investment strategy that is heavily based on computer algorithms, which he characterizes as “the Holy Grail of investing.” Stemming from painful life lessons and a “terrible rote memory,” Dalio developed a series of principles in an effort to balance life, work, economic, and investing imperatives, and to establish a what he terms “radical transparency” as a guideline for Bridgewater employees.
It is these principles that he is now promulgating in a two-part “recipe” that is Principles. The first book reflects on life and work principles, while the second part—which is scheduled for release next year— will focus on economic and investing principles.
“It’s really the actual encounters of somebody who did the active management business for 42 years—and did it pretty successfully—and wrote those encounters down so others could consider them,” Dalio says of Principles. “I’m putting this book out to communicate [these principles] and sometime in the future I’ll probably want to pass along some of the tools that we’ve developed so they can help operate in this idea-meritocratic way,” he told CIO.
Dalio remained mostly out of the public eye as he developed his investment prowess—refining his principles and strategies, and making revolutionary discoveries between 1996 and 2003, such as inflation-indexed bonds and risk parity — the former in which he created during a dinner with David White, the man formerly in charge of the Rockefeller Foundation’s money. White needed to know how he could shift the portfolio in a way that it would produce a return 5% above the US inflation rate. By determining that a portfolio of leveraged- foreign inflation-indexed bonds with the currency hedged back to US dollars would meet that objective, Dalio put the plan into action. Shortly afterward, Bridgewater became the first global inflation-indexed bond manager in the world. The concept for risk parity came about when Dalio was seeking to build an asset-allocation combination that would be balanced enough to perform well in all environments, which he called the “All Weather Portfolio.” Bridgewater was the only “client” investing in the strategy, until the head of Verizon’s pension fund was looking for a similar investing tactic in 2003. The idea caught on. A decade later, Bridgewater was managing nearly $80 billion. Dalio writes that the strategy is now “generically” called risk parity investing.
Yet it wasn’t until Dalio foresaw the 2008 financial crisis on the horizon that he knew he had to emerge from his investing cocoon. It was partly because of technology Bridgewater had implemented in the early 2000s , termed a “depression gauge” by Dalio. The quant system was designed to indicate specific actions the firm should take in the event heightened risk of a debt crisis or depression presented itself. In 2007, the gauge indicated that a debt bubble was approaching its bursting point due to debt service costs outpacing projected cash flows. Since interest rates were falling towards 0%, Dalio said he knew there wasn’t much the central banks could do to relax monetary policy any further to reverse the downturn as they had in previous recessions. Based on his extensive research of debt crises throughout history and their effect on the markets, it represented a financial-market scenario that Dalio knew would trigger another collapse.
Market conditions in 2007 caused Dalio to harken back to 1982, he said, a period that ingrained in him the need to research debt crisis’ and to understand their effects on financial markets....MUCH MORE
