Ray Dalio Part Two: Bridgewater Grows

valuewalk.com /2015/06/ray-dalio-part-two-bridgewater-grows/
Rupert Hargreaves
Share on Pinterest

Share with your friends

Your Name
Your Email
Recipient Email

Enter a Message
<span class="textnode">I read this
article and found it
very interesting,
Submit
thought you would
enjoy. The article is
This
is Ray
part Dalio
two of
a ten-part series on Ray Dalio (and part of our ebook), founder of Bridgewater
called
Associates
Part Two: the worlds largest hedge fund. Founded by Dalio during 1975 from his two-bedroom
apartment,
Bridgewater manages $169 billion for a wide array of institutional clients, including
Bridgewatertoday
Grows
and is located
at
foreign
governments
and central banks, corporate and public pension funds.
http://www.valuewa
lk.com/2015/06/ray
Over
its 40-year history, Bridgewater has been recognized as a top-performing manager and an
-dalio-part-twoindustry
innovator. The fund manager was one of the few firms to register a positive performance
bridgewaterduring
2008
crisis.
grows/.the
You
are financial
not
subscribed to any
In
2012, RayIf Dalio
newsletter.
you appeared on the annual Time 100 list of the 100 most influential people in the world.
And
Bloomberg Markets list of the 50 Most Influential people during 2011 and 2012.
wishhe
to made
subscribe
According
to our freeto Forbes, at time of writing Ray Dalio is worth $15.4 billion, making him the 29th richest
newsletter
please
person
in the
United States, 2nd richest hedge fund manager and #60 richest in the world.
follow this link
http://www.valuewa
You
can find part one of this series here.
lk.com/sign-email/.
</span>

Ray Dalio

Ray Dalio -- Part two: Bridgewater grows

Ray Dalio started Bridgewater during 1975, with only a few clients from his days at Shearson Hayden
Stone. 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 Dalio
persuaded 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 sought
to 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 Dalio
likes to spread his bets on the market and will typically have 30 to 40 different trades on at any one
time.

Its always a matter of controlling risk, Dalio has said in the past. Im always trying to
figure out my probability of knowing, and given that Im never sure, I dont want to have
any concentrated bets.

Achieving alpha
Bridgewater usually places spread bets, where the fund will purchase one security it considers
undervalued 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 driver
behind 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 noncorrelated
performance, -3.5%, 6.1% and 14.2% respectively. During 2008, the fund reported a positive
performance of 8.7% while the S&P 500 fell 38.49%.
Earlier this year, within Bridgewater's monthly presentation to clients, the company discussed their
method of separating alpha, or manager skill, from beta, or the general market environment, the key
principle behind the Pure Alpha strategy.

Pure Alpha
Bridgewaters Pure Alpha strategies together manage $81 billion, making the two -- Pure Alpha and
Pure Alpha Major Markets -- the largest funds managed by Bridgewater. The group's All Weather
strategy 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 Nominal
Interest Rates group is by far the largest of the portfolio with around of a third of Pure Alphas AUM
invested.
Bridgewaters Pure Alpha strategy targets 12% volatility and has, since 1991, returned 9.91% per year
excluding fees.

Far from simple

Most of the world's most successful hedge fund managers have been able to achieve outsized returns
by 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 strategies
across a broad portfolio to achieve results. Ideas are discussed with the funds investment officers and
then 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, by
managements 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 ensure
the reliability of our investment returns.
As a result of Bridgewaters diversification, managers expect the Pure Alpha fund to make money in
five out of six years.

Pure Alpha is a highly diversified set of uncorrelated alpha return streams. Our
positions in each market are driven by a systematic assessment of the unique
underlying fundamental drivers of that market. Our performance is driven primarily by
our winning percentage across these markets. Our winning percentage normally
oscillates 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 asset
managers. Our alpha returns are independent from the returns of other markets
because we explicitly separate our alpha from our beta and have no bias to be long or
short any particular market. And our returns are uncorrelated to the returns of other
managers because our skill in trading market has no relation to the skill of other
managers, and to the extent that other manager have embedded beta exposures we are
uncorrelated to those betas. -- Bridgewater 2013 Strategic Report

Stay tuned
Bridgewater's Pure Alpha strategy is just one of the many developments that's helped fire up Ray
Dalio's career. Stay tuned for part three of this series, where I'm going to take a closer look at
Bridgewater's All Weather Strategy and group principles.
Like this article? Sign up for our free newsletter to get articles delivered to your inbox