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The Story of Bridgewater Associates – Hedge Funds

October 28, 2012 in Hedging and Hedge Funds

Hedge funds - the story of Bridgewater Associates

From a January, 2008, newsletter by Bridgewater Associates cited in The New Yorker:

“If the economy goes down, it will not be a typical recession.” Rather, it would be a disaster in which “the financial deleveraging causes a financial crisis that causes an economic crisis. . . . This continues until there is reflation, currency devaluation and government guarantees of the efficacy of key financial intermediaries.”

That is prophetic as shown by subsequent events.

Bridgewater Associates, run by legendary hedge fund manager, Ray Dalio, is one of the most successful hedge funds ever. A ‘global macro’ firm, the firm manages about $130 billion in assets, primarily for institutional clients such as pension funds, endowments, charities and sovereign funds.

Ray Dalio founded the firm in 1975, commencing business from a two-bedroom apartment. The son of a jazz musician, he earned a side income as a golf caddy and often received stock tips from wealthy golfers. By age 12 he had made his first stock investment, and grew that to an investment worth a few thousand dollars by the time he entered college. He obtained a BA degree from Long Island University and an MBA from Harvard. He then served a short stint as a futures trader, and thereafter set up Bridgewater at age 25.

The firm currently operates out of a wooded, secluded and waterside headquarters located in Westport, CT, and has about 1200 employees. Bridgewater was ranked in 2010 and in 2011 as the biggest and best-performing hedge fund manager in the world.

Bridgewater Associates

 

 

The firm is known for its adept understanding of economic trends and events globally, and takes advantage of these macro moves by making trades in a huge variety of assets and markets around the world.  Dalio abhors risk, and its natural cousin, excessive leveraging. Key to his investing strategy is the dilution of risk by the means of innovative and varying distribution of assets (allocation), and a strict avoidance of excessive leverage. Where other hedge funds go for big-hit, ‘home-run’ returns, Bridgewater is known to take the route of smaller, but less riskier returns, generated over and over again.

The firm became a pioneer in its field by introducing strategies such as inflation-linked bonds, currency overlay and was the first to segregate its funds between and alpha (actively managed, higher returns) and beta (passively managed, standard market returns) investments. Its flagship funds were the Pure Alpha Fund and the All Weather Fund.

Starting from about $5 million in the nineties, assets under management (AUM) reached $33 billion by year 2000 and then onto $50 billion by 2007. The launch of the Pure Alpha Major Markets Fund catapulted AUM past the $100 billion mark in 2010.

The firm is reputed for its slightly off-beat (sometimes described as cult-like in the media)  management policies that demand complete transparency and adherence to a set of ‘Principles’ authored by Dalio that effectively dominates its culture, and methods of operation. Reportedly, these Principles are also linked into the computer system and used for investment analysis. All meetings are recorded electronically and are available to be viewed for training and analysis.

The firm’s Pure Alpha Fund earned over $13.8 billion during 2011. This brought the fund’s total earnings since its inception in 1975 to $35.8 billion, taking it past the $31.2 billion that was earned by Soros’ Quantum Fund between 1973 and 2011.