Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Artificial Intelligence
    • Consultants
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Regulation
    • SECURE 2.0
    • Special Reports
    • Washington
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Influential Women in Institutional Investing 2023
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
    • Divestment Database
  • Defined Contribution
    • Latest DC News
    • The Plan Sponsor's Guide to Retirement Income
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • DC Plan Design: Improving Participant Outcomes
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
  • Print
Breadcrumb
  1. Home
  2. HEDGE FUNDS
September 13, 2017 01:00 AM

Bridgewater's Dalio talks life, work in new book

Christine Williamson
  • Tweet
  • Share
  • Share
  • Email
  • More
    Bloomberg
    Bridgewater Associates founder Raymond Dalio

    Institutional investors play a prominent role in "Principles," Raymond T. Dalio's new book about his life and work as the founder, co-chief investment officer and co-chairman of Bridgewater Associates LP.

    In fact, it was a request in 1990 for help in hedging the equity risk of Eastman Kodak Co.'s pension fund from Russell "Rusty" Olson, the chief investment officer at the time, that led Mr. Dalio and his colleagues to devise the firm's flagship Pure Alpha investment strategy.

    The 550-page book, which hits virtual and brick-and-mortar book stores Sept. 19, is designed to be a how-to manual for personal and work life issues and is neatly divided into two parts.

    In the first half, Mr. Dalio focuses on his professional life and the principles he developed to help himself and other Bridgewater employees make better decisions.

    The second segment is an updated version of Bridgewater's widely known — and controversial — internal working principles that focus on and foster "radical truth" and transparency among the firm's employees who manage $165 billion in hedge fund and risk-parity portfolios for an institutional client base.

    In an interview with Pensions & Investments, Mr. Dalio said "Principles" resulted from his preparation to step away from managing the business side of Westport, Conn.-based Bridgewater. He relinquished the role of co-CEO earlier this year, leaving the administration of the firm to co-CEOs David McCormick and Eileen Murray.

    "It was very important that I write everything down so I'm not needed to run the firm. 2017 is my transition year out of management but not out of investment management, which I intend to do for the rest of my life," Mr. Dalio said during the telephone interview.

    That Mr. Dalio founded Bridgewater in 1975 from a two-bedroom apartment has become the stuff of investment industry legend but what's not well known is that he did not set out to be a money manager and an institutional specialist.

    "Unlike most people who work in the markets, I never had any desire to build investment products, especially conventional ones, just because they would sell well. All I wanted was to trade the markets and build relationships, doing for our clients exactly what I would do if I were in their shoes," Mr. Dalio wrote.

    In the early years, Mr. Dalio and his team focused on developing systematic trading systems utilizing the "rapidly expanding power of computers during that era," he wrote. The firm's three main businesses were fee-based consulting, managing companies' risks for incentive fees and selling its research.

    Until late 1983, Bridgewater's business grew by word of mouth. But realizing that "clearly, there was a growing demand for our research" and that selling the research would supplement trading and consulting income, Mr. Dalio wrote, he hired a marketer, Rob Fried, a former door-to-door Bible salesman.

    The road trips Messrs. Dalio and Fried made to sell the company's $3,000-per-month research package, including daily telexes, weekly conference calls, biweekly and quarterly research reports, and quarterly meetings, resulted in asset owners such as The World Bank, General Electric, The Singer Co., Loews Corp. and GTE Corp., as well as institutional money managers such as Wellington Management Co., Loomis Sayles & Co. LP and Brandywine Global Investment Management LLC becoming Bridgewater clients.

    Having dealt closely with these new external clients, Mr. Dalio wrote that he changed his mind about managing money. "By the mid-1980s, a couple of things were clear to me: First, we were making good calls in the interest rate and currency markets, and the institutional investment managers who were buying our research were using it to make money. Second, we were successfully managing companies' interest rate and currency exposures. With those two things going as well as they were, I figured we could become successful institutional investment managers ourselves."

    Mr. Dalio's first pitch for money management services was to Hilda Ochoa, then CIO of the World Bank's pension fund, and "despite the fact that we had no assets under management and no track record, she gave us a $5 million U.S. bond account to manage," wrote Mr. Dalio, adding "that was a huge turning point for us, as it was the start of Bridgewater as we know it today."

    The strategy Bridgewater used for managing the World Bank mandate "did very well and before long, other large institutional investors gave us money to manage as well," Mr. Dalio wrote, noting Mobil Oil and Singer were the firm's next two institutional investment management clients.

    By 1990, Bridgewater's 24 employees were running $180 million but were "still trying to grab a larger foothold in the institutional investment business," Mr. Dalio wrote.

    The 1990 fax from Eastman Kodak's Mr. Olson — who was not yet a Bridgewater client — was a pivotal point for the firm.

    "The Kodak pension fund was heavily invested in equities and Rusty was worried about what would happen in an environment in which the value of his assets fell badly. He had been trying to come up with a way to hedge himself against this risk without reducing his expected return," Mr. Dalio said in his book.

    The Bridgewater team deconstructed the Kodak portfolio into its constituent parts — essentially what produced alpha and what produced beta — and devised a portfolio management solution that "drew on the portfolio engineering ideas that would later become core to Bridgewater's unique way of managing money," Mr. Dalio wrote. Mr. Olson ended up investing $100 million in the proposed strategy.

    "That was a game changer," Mr. Dalio wrote, adding "not only did it bring us a lot of credibility, it provided us with a reliable source of income at a time when we needed it."

    Building on the portfolio engineering processes used for the Kodak strategy, Bridgewater researchers delved further into portfolio diversification to see how alpha and beta could be separated. The team tested Mr. Dalio's theory that the volatility of a portfolio would decline and its quality improve if investments with different correlations were added.

    The results of the experiment "struck me with the same force I imagine (Albert) Einstein must have felt when he discovered E=mc2," Mr. Dalio wrote, noting, "I saw that with 15 to 20 good, uncorrelated return streams, I could dramatically reduce my risks without reducing my expected returns."

    The discovery led to the development and launch in 1991 of the firm's flagship Pure Alpha strategy, an alpha overlay that allowed investors to get the return of whatever asset class they chose plus the return from the bets Bridgewater was making across asset classes.

    The rest is investment industry history. Institutional investors have flocked to the Pure Alpha approach: assets now total $83 billion and the strategy is closed to new investors.

    Mr. Dalio noted in the book that Pure Alpha strategy has produced positive returns in 23 of its 26 years and made "more money in total for our clients than any other hedge fund ever."

    During the telephone interview, Mr. Dalio said one of his accomplishments was his contribution to the separation of alpha and beta sources and the ways investors can calibrate the right proportion of each in their portfolios.

    One of the upsides of shifting his concentration back to money management is the ability to spend time with more of Bridgewater's institutional investors, working out solutions to thorny investment issues, he said.

    The timing of Mr. Dalio's move back to the investment side of the firm comes at a crucial time for institutional investors who are going to find it "harder than ever to beat their hurdles" in a low-return environment, he said.

    "It's all about how you diversify your portfolio. You need to really understand financial engineering This is a time when you do not want to be too concentrated because debt and financial obligations are going to lead to low nominal and low real returns," he added.

    Mr. Dalio discussed his life and work principles in a TED talk in September.

    He also spoke with Pensions & Investments' Christine Williamson and Joel Chernoff about how the firm's Pure Alpha strategy not only survived but thrived during the 2008 financial crisis in a vintage 2009 podcast from Bridgewater's Westport, Conn. headquarters.

    Related Articles
    Ray Dalio to step down from co-CEO role as part of shakeup at Bridgewater
    Market experts focused on political risks
    Gainers finally outpacing losers
    Managers bowing more to needs of institutional clients
    Bridgewater shifting to partnership structure, expanding equity holders
    Dalio Foundation supporting deep-sea research
    Recommended for You
    Chinese_Flag_i.jpg
    Eastspring, Barings shrink hedge fund teams in China pullback
    ONLINE_170929821_AR_0_JLHFUUIWPHMY.jpg
    Citadel, peers piling into same trades. Regulators are noticing
    Blackstone_Closeup_1550_i.jpg
    Blackstone to end legacy strategy that gave money to hedge funds
    Open Window of Opportunity in Real Estate
    Sponsored Content: Open Window of Opportunity in Real Estate
    Sponsored
    White Papers
    What a Fed pivot and ‘higher for longer’ mean for emerging markets
    A Guide to Home Equity Investments: The Untapped Real Estate Asset Class
    How to Modernize a School District Retirement Plan
    Q4 2023 Credit Outlook: Price Is What You Pay, Value Is What You Get
    There's More Than One Way to Be a Climate Investor
    Exploring the Commercial Application of Artificial Intelligence
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    October 23, 2023 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Custom Content
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Artificial Intelligence
      • Consultants
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Regulation
      • SECURE 2.0
      • Special Reports
      • Washington
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Influential Women in Institutional Investing 2023
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
      • Divestment Database
    • Defined Contribution
      • Latest DC News
      • The Plan Sponsor's Guide to Retirement Income
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • DC Plan Design: Improving Participant Outcomes
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
    • Print