Tuesday 14 October 2014

Hedge fund boss and his 'radical' philosophy

Bridgewater founder Ray Dalio runs his firm with 'radical truth and transparency'
By Lee Su Shyan, Money Editor, The Sunday Times, 12 Oct 2014

It isn't a widely known fact but US hedge fund behemoth Bridgewater Associates has managed some of the funds of sovereign wealth fund GIC for the past two decades.

Bridgewater founder Ray Dalio was in town recently to celebrate 20 years of that partnership, one that has benefited both sides, he says in an interview with The Sunday Times.

Mr Dalio, 65, has only high words of praise for his client as well as for GIC's former group chief investment officer Ng Kok Song, who recently retired from the top post and chairs GIC's global investments.

He said that many clients don't like to be told that they are doing something wrong. "In GIC's case they would say 'Why?' and explore it," he says.

Instead of a commercial relationship where each seeks to get the best out of the arrangement at the expense of the other, he says his partnership with GIC has been one where they have looked out for each other. "They have always wanted to do the right thing... and that was a function of Kok Song and the organisation under his leadership," he says.

"When we sit here today and look back, it was a 20-year friendship based on mutual consideration and high standards," he says.

Mr Dalio is equally complimentary about Singapore, saying there is "no country in the world that is so admirable as to be able to particularly raise its income levels, without losing its financial responsibility".

However he sounded a warning on countries that are no longer rich but profligate. The cycles mirror those of families, with a Chinese saying that the wealth of families lasts only three generations.

Countries start off being poor and think of themselves as poor, Mr Dalio notes. They then become rich after working hard and saving but still think of themselves as poor. That's when growth is good. The next stage is when countries are rich and think of themselves as rich and want to enjoy themselves more and spend more. The fourth stage is when countries are poorer but still think of themselves as rich.

Singapore continues to have a strong work and savings ethic, Mr Dalio says, but he holds up the US as a cautionary example of countries that have reached the stage where they borrow as they have spent beyond their means.

The man and founder

When Mr Ray Dalio speaks, people listen. He is, after all, the founder of what is the world's largest hedge fund with US$150 billion (S$191 billion) of assets under management and clients worldwide including foreign governments, central banks and pension funds. A piece he wrote in 2007 predicting the US housing boom would end badly and his subsequent warning about the major banks being over-leveraged have cemented his reputation as one of the savviest fund managers around.

Descriptions of Mr Dalio range from that of having the look of an ageing rock star to intense and even enigmatic.

The son of a jazz musician and a stay-at-home mum, he says he was a "less-than-ordinary student". He started caddying when he was 12 at a club where many Wall Street investors played. Hearing about Northeast Airlines, he bought the shares as the price was low and he could afford to buy more. When the airline was taken over, he tripled his return. That attracted him to trading in the markets. After college, he managed to win a spot at Harvard Business School, enjoying his time there before snaring a job trading commodity futures.

He moved to another brokerage but was fired - "essentially for insubordination". He then set up Bridgewater Associates in 1975, in a two-bedroom apartment in Connecticut. He was just 26.

In 1994, when GIC recruited Bridgewater as an external fund manager, the company had 39 employees. Today, the company has a staff of 1,400.

Investing is like a machine

For those curious about what goes on behind the scenes at one of GIC's longest-running partners, a good start would be a 123-page booklet called Principles in which Mr Dalio has distilled his philosophy on life, investments and organisation management.

It is no textbook where technical terms are explained. Instead it discusses fundamental principles - such as "What is true?" or a discussion on "Pain plus reflection equals progress" or "Reality plus dreams plus determination equals A Successful Life". It is pretty much required reading for Bridgewater employees.

Last year, he shared his investment secrets and economic theories on YouTube via How The Economic Machine Works, a 30-minute video he narrates with animated drawings.

One of his key philosophies therefore is that the economy is like a machine. "When we understand the cause and effect and run it through time (so) the criteria are clearly known, then the criteria can be written down in computer formulas." One key event shaping Mr Dalio's investment philosophy came in the 1970s when then US President Richard Nixon announced that the nation was abandoning the fixed exchange rate system for a floating exchange rate. Mr Dalio expected stocks to plunge but they shot up higher instead. For Mr Dalio, this was when he realised that trusting his own experience was too narrow a perspective. And while this currency event may have seemed unique to him, it had happened previously in other countries.

In other words, the same essential dynamics were playing out under different circumstances. This is what Mr Dalio calls the "economic machine", timeless and universal relationships that explain economic outcomes and are repeated through time.

"So by writing the criteria down, we could systemise the decision- making process. Rules should be timeless and universal," he adds.

This means that by going back 100 years, the rule would work and it would work universally, across different countries. It also means that sometimes what the machine recommends and what the team recommends is different.

"And that is because in the decision-making process, the computer does takes into account many more variables than my mind can process," Mr Dalio says.

Instead of hiding away his mistakes, Mr Dalio says: "I love my mistakes. Every mistake is a learning opportunity."

Bridgewater's approach is to look at the big picture. Using data and market behaviour, it invests in global stocks, bonds and currencies based on its view of gross domestic product growth or inflation, for example.

There are two main funds, an All-Weather fund and a Pure Alpha fund, both of which GIC has invested in. Pure Alpha has generated an average 14.4 per cent return for investors in each of the five years up to last year, while the All Weather fund has returned an average of 12.4 per cent over the same period.

The basis for the All-Weather fund is as its name suggests, an investment portfolio that performs well across all environments, be it a devaluation of a currency or high inflation.

Being wildly successful doesn't mean Bridgewater has been immune from criticism, not least from those who know it from the inside. Some former employees have likened the corporate culture to that of a cult. "Weird" is another adjective that has been used.

Mr Dalio says his firm is run along the lines of "radical transparency, radical truth". Employees either like it or they don't, he adds dryly.

Radical truth refers to looking at problems and weaknesses and embracing them. Radical transparency includes the taping of conversations so that all know what has been said. Employees have to get used to open debate and feedback from colleagues.

When asked about the criticism from former employees, Mr Dalio says: "After a couple of years, people either leave or adapt ...They cannot work somewhere else, because they don't know whether people are talking about you." Taping conversations allows for analysis and improvement; in a way, it shows up one's blind spots and this allows everyone to know one another's weaknesses and in fact can be a way of watching someone's back.

On a more practical note, Bridgewater employees note that taping allows staff to watch Mr Dalio talking about earlier events and compare it to what is happening presently. For staff who travel, this allows them to catch up on meetings they have missed.

Asked what he looks for in an employee, he cites three things: character, common sense and creativity.

Character, he notes, refers to integrity, to have the ability to do the things that are right or difficult.

Quipping that "common sense is anything but common", he adds that "there are too many bright people who graduate from the best universities who remember well and follow instructions. The unconventional, thoughtful and independent people are not as easy to find".

Mr Dalio now has taken on more of a mentor role at Bridgewater, saying that will enable Bridgewater to make the transition from an entrepreneurial organisation.

He has more time now to pursue his interests in nature and hunting. "When I go out in the woods and I see the incredible complexity there is, it is miraculous." Naturally, with an interest in machines and meditation, Mr Dalio is also keen on neuroscience, artificial intelligence and physics.

Despite being worth an estimated US$15 billion according to Forbes, Mr Dalio points to his US$150 Orvis watch: "Status is unhealthy. I don't like luxuries."

He adds: "Money is not a goal in itself."

Money means, "first, can I take care of my family; second, can I have freedom... how many years, I could get by without working so that I was free to do what I wanted. I happened to be in an industry that produced money but it was always a game for me. I could have played chess."

A great partnership

"They have always wanted to do the right thing... and that was a function of Kok Song and the organisation under his leadership."

Mr Ray Dalio, founder of Bridgewater Associates, on GIC and its former group chief investment officer Ng Kok Song


With billions of dollars at stake and the risk of getting emotional about investments, Mr Dalio is a strong proponent of transcendental meditation.

He writes in his booklet Principles that he discovered it after reading about the Beatles travelling to India to learn about meditation.

And indeed, he is at the forefront of a trend in the United States these days where traders practise meditation.

Mr Dalio tries to practise meditation for 20 minutes, twice a day. "Meditation gives me equanimity. It takes me out of the situation."


Like many wealthy Americans, Mr Dalio has set up a family foundation, the Dalio Foundation.

He has signed "The Giving Pledge", committing to giving half of his net wealth to charity over his lifetime. With a personal fortune estimated at some US$15 billion (S$19 billion) by Forbes, he says he has given his four children health, education and maintenance. "The best gift I can give my children is self-sufficiency."

He said: "I have come from a background where there is opportunity. So I like microfinance, where I can see the power of giving someone US$1,500. The two basic things for equal opportunities are education and enough money so that someone can get started."

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