Loosely, a hedge fund is like a mutual fund with almost no regulation. They can blow up economies, or they can be conservative. The ones that get all the press tend to be the more aggressive ones.
The world of hedge funds attracts the real killers of the financial world. The money to be made would make Canadian bank CEOs blush. There are a number of hedge fund managers who have pulled in more than a billion dollars in a single year. That’s billion with a “b”, and that’s their personal income, not the growth of the fund spread over thousands of millionaire clients.
One such guy is Ray Dalio, the founder of Bridgewater Associates. I have always found him to be fascinating. His firm is head-quartered in Westport, Connecticut, not on Wall Street. (Tangent: I think this is the first time in my life I’ve ever written out Connecticut and I had no idea, until the spell-check flagged it, that Connecticut had three “c”s in it. Anyway…) They managed over $120 billion in assets 2011, making them the largest hedge fund manager by assets, and they have been described as cultish.
In 2007 Dalio walked into the White House and instead of weighing in on the conversation about liquidity, he told them they should be worrying about solvency instead. Apparently his warnings were brushed aside, but now Bridgewater’s Daily Market Observations (a regularly published research note) is read by central bankers around the world. Even Obama reads it. You can subscribe to it here.
A Cult? Or Genius?
One of the reasons Dalio and Bridgewater have been described as cult-like may have to do with a manifesto that is circulated to employees which outlines the firm’s principles (well over 200 of them). Dalio argues that most people with a negative view of the manifesto haven’t read all the principles. Looking at excerpts won’t do it justice, but here are a few:
125) Recognize that behavior modification typically takes about 18 months of constant reinforcement. The first step is intellectualizing the best way of doing things. If you’re out of
shape you must understand that you are out of shape, you must want to get in shape, and you must understand the way to get in shape: “I want to be fit by eating well and exercising.” Then the intellect will fight with desires and emotions. With determination, the intellect will overcome the impediments to doing what’s necessary to achieve the goal, and the desired behavior will occur. After doing that consistently for
18 months, the new behavior will be internalized.
The words “behavior modification” probably raise a mental red flag, but is there anything here that I fundamentally disagree with? You might quibble with the duration of 18 months, but not a deal-breaker. Here’s another:
132) Do not lower the bar. If a person can’t operate consistently with our requirements of excellence and radical truth and can’t get to the bar in an acceptable time frame, they have to leave. We want to neither lower the bar nor enter into a long-term rehabilitation program.
I see nothing wrong with this. Here’s another:
142) Don’t use the anonymous “we” and “they,” because that masks personal responsibility—use specific names. For example, don’t say “we” or “they” handled it badly. Also avoid: “We should…” or “We are…”Who is “we”? Exactly who should, who made a mistake, or who did a great job? Use specific names. Don’t undermine personal accountability with vagueness. When naming names, it’s also good to remind people of related principles like “mistakes are good if they result in learning.”
I like this one too. In fact, as I was going through the manifesto I realized it started to make more and more sense. In a world where we’ve stopped taking score in kids’ soccer games so no one’s feelings get hurt, bluntness is something that’s being conditioned out of us. But we live in the real world. And in the investing arena, where alpha is a zero-sum game, there are winners and there are losers and the stakes are huge. End of story.
Don’t care about NSA snooping
Meetings with senior management are recorded and employees are able to review the recordings. One of the core principles of Bridgewater is openness and transparency. Eradication of ego is paramount. Dalio will send employees emails that might simply say, “I think you are wrong about xyz.” There’s no mind-game. He just thinks you’re wrong and would like to discuss it. You might show him he is wrong and he’s fine with that. He cares solely about finding the right answers. Even junior analysts are free to call him out in front of a crowd.
Stocks will return 4%, you can’t beat him, so hold a balanced portfolio of index funds
At the recent Dealbook Conference, Dalio essentially predicted a low return environment of 4% before inflation for years to come. He also suggested that because Alpha is a zero-sum game and you are competing with the likes of him and 150+ super nerds working more than full-time with near-super computers, you aren’t likely to win due to skill. He suggested the best option for retail investors against that is to hold a balanced portfolio (presumably comprised of low cost index funds).
Grab a big cup of coffee
The genesis for this blog post (the first actual blog post in who-knows-how-long) was because I simply thought a feature from 2011 in The New Yorker on Dalio was worth reading. Not because I think you should invest in hedge funds, but simply because it’s an interesting read. Grab a big cup of coffee and read it here. The author had privileged access to Dalio and was even allowed to sit in on Bridgewater meetings so he could see the full inner workings.
Grab the entire carafe
If you would like to read the Life and Management Principles of Ray Dalio and Bridgewater, you can read it here. What do you think? Cult? Or Alpha Dog?