Ray Dalio
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This is part two of a ten-part series on Ray Dalio (and part of
our ebook), founder of BridgewaterAssociates the worlds largest
hedge fund. Founded by Dalio during 1975 from his
two-bedroomapartment, today Bridgewater manages $169 billion for a
wide array of institutional clients, includingforeign governments
and central banks, corporate and public pension funds.
Over its 40-year history, Bridgewater has been recognized as a
top-performing manager and anindustry innovator. The fund manager
was one of the few firms to register a positive performanceduring
the 2008 financial crisis.
In 2012, Ray Dalio appeared on the annual Time 100 list of the
100 most influential people in the world.And he made Bloomberg
Markets list of the 50 Most Influential people during 2011 and
2012.According to Forbes, at time of writing Ray Dalio is worth
$15.4 billion, making him the 29th richestperson in the United
States, 2nd richest hedge fund manager and #60 richest in the
world.
You can find part one of this series here.
Ray Dalio -- Part two: Bridgewater growsRay Dalio started
Bridgewater during 1975, with only a few clients from his days at
Shearson HaydenStone. But the business began to grow rapidly during
1985.
After signing up McDonald's and one of the company's major
suppliers as a client, Ray Daliopersuaded the World Banks employee
retirement fund to let Bridgewater manage some of its capital.Then,
during 1989 Bridgewater signed up Kodaks retirement system.
In Bridgewaters early days, the funds philosophy was much the
same as it is today. The fund soughtto achieve steady returns by
investing in a variety of markets such as U.S. and international
bonds,
using leverage to boost its exposure. Take, for example,
Bridgewaters Pure Alpha fund. Ray Daliolikes to spread his bets on
the market and will typically have 30 to 40 different trades on at
any onetime.
Its always a matter of controlling risk, Dalio has said in the
past. Im always trying tofigure out my probability of knowing, and
given that Im never sure, I dont want to haveany concentrated
bets.
Achieving alphaBridgewater usually places spread bets, where the
fund will purchase one security it considersundervalued and selling
short another one it considers overvalued.
The returns from spread bets tend to be uncorrelated with the
overall market, and, this is the key driverbehind Bridgewaters
unparalleled ability to achieve alpha.
For instance, during the dot-com bubble and the following
September 11, 2001 terrorist attacks,Bridgewater held steady. In
2000, 2001 and 2002 Bridgewater reported strongly
noncorrelatedperformance, -3.5%, 6.1% and 14.2% respectively.
During 2008, the fund reported a positiveperformance of 8.7% while
the S&P 500 fell 38.49%.
Earlier this year, within Bridgewater's monthly presentation to
clients, the company discussed theirmethod of separating alpha, or
manager skill, from beta, or the general market environment, the
keyprinciple behind the Pure Alpha strategy.
Pure AlphaBridgewaters Pure Alpha strategies together manage $81
billion, making the two -- Pure Alpha andPure Alpha Major Markets
-- the largest funds managed by Bridgewater. The group's All
Weatherstrategy comes in a close second with $79 billion in
assets.
The Pure Alpha portfolio is spread across eight different asset
subcategories: Developed Currencies,Nominal Interest Rates
(Directional), Nominal Interest Rates (Spread), Inflation Linked
Bonds,Sovereigns and Corporate Credit, Equities, Commodities and
Emerging Currencies. The NominalInterest Rates group is by far the
largest of the portfolio with around of a third of Pure Alphas
AUMinvested.
Bridgewaters Pure Alpha strategy targets 12% volatility and has,
since 1991, returned 9.91% per yearexcluding fees.
Far from simpleMost of the world's most successful hedge fund
managers have been able to achieve outsized returnsby placing large
directional bets on one security, or asset class.
But this strategy would be too simple for Bridgewater.
The firm's Pure Alpha strategy is far from simple. Indeed,
Bridgewater uses a complex set to strategiesacross a broad
portfolio to achieve results. Ideas are discussed with the funds
investment officers andthen carefully monitored to ensure that they
are performing in a manner consistent with expectations.
Still, even with 40 years' experience managing money Bridgewater
still makes mistakes, and, bymanagements own admission, even
Bridgewaters best ideas are only right around 60% of the
time:without significant diversification our results would
inevitably produce periods of unacceptable risk.
Therefore, we have assembled a portfolio with a sufficient
number of uncorrelated strategies to ensurethe reliability of our
investment returns.
As a result of Bridgewaters diversification, managers expect the
Pure Alpha fund to make money infive out of six years.
Pure Alpha is a highly diversified set of uncorrelated alpha
return streams. Ourpositions in each market are driven by a
systematic assessment of the uniqueunderlying fundamental drivers
of that market. Our performance is driven primarily byour winning
percentage across these markets. Our winning percentage
normallyoscillates within a range of roughly 40% to 80% with a norm
of about 60%...
In recent years outperformance has remained uncorrelated to
other markets and assetmanagers. Our alpha returns are independent
from the returns of other marketsbecause we explicitly separate our
alpha from our beta and have no bias to be long orshort any
particular market. And our returns are uncorrelated to the returns
of othermanagers because our skill in trading market has no
relation to the skill of othermanagers, and to the extent that
other manager have embedded beta exposures we areuncorrelated to
those betas. -- Bridgewater 2013 Strategic Report
Stay tunedBridgewater's Pure Alpha strategy is just one of the
many developments that's helped fire up RayDalio's career. Stay
tuned for part three of this series, where I'm going to take a
closer look atBridgewater's All Weather Strategy and group
principles.
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Ray Dalio Part Two: Bridgewater GrowsRay Dalio -- Part two:
Bridgewater growsAchieving alphaPure AlphaFar from simpleStay
tuned
