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Ray Dalio and Bob Prince:
It’s a way of thinking that is different
(Photographs by Michael Edwards)

By Michelle Celarier & Lawrence Delevingne

Ray Dalio doesn’t want to talk about himself. His face is drawn, the loss of weight aging the 61-year-old. Dressed down in corduroys and an open-neck dark blue shirt, Dalio leans intently across the table, narrows his eyes and insists that the world’s largest hedge fund firm, with $87 billion in assets, is bigger than the man who started it more than 35 years ago.

"It’s not about me," he says brusquely.

But Bridgewater is Dalio. An enigmatic character whose economic insights are pored over by central bankers across the globe, he famously started the firm at age 25. Now Dalio, who is president, chief executive and chief investment officer of Bridgewater, is starting to pull back. Last year he sold 20% of his and his family trust’s equity to senior executives and the firm itself, although he maintains control. The firm now has two other co-CIOs and co-CEOs and a nine-person management committee. Moreover, Dalio has been trying to institutionalize the firm’s brutal culture to prepare for a Bridgewater without him by penning a book to live and work by, which he calls, simply, "Principles."

In terms of performance, last year was Bridgewater’s best ever, as it netted 44.8% in its $37 billion Pure Alpha 18% volatility fund and 27.4% in the $11 billion less-levered Pure Alpha 12% volatility fund. Along with a smaller new fund, and managed accounts, they account for the $59 billion that makes Bridgewater the largest hedge fund firm in the world, according to AR’s Billion Dollar Club. Another $28 billion is in Bridgewater’s All Weather fund, a leveraged beta strategy that some investors view as a hedge fund. That fund gained 17.6% in 2010.

Last year’s stellar showing was a big change for Bridgewater, which won AR’s Management Firm of the Year award in 2010. Dalio called the credit bubble in 2006, enduring years of single-digit returns during the past decade. But by 2008, caution was serving investors well: Pure Alpha leapt ahead, gaining 8.7% when many hedge funds were in the red.

The numbers posted in 2010—which Bridgewater warns is a once-in-20-years event—were particularly well timed: Bridgewater, and Dalio, last year endured a flurry of bad publicity that likened the hedge fund to a cult, given the Tao of Dalio under which it operates. A working environment of ego-demolishing criticism has made recruiting challenging. Turnover is high; the new management committee includes five people hired within the past two years. Moreover, the constant questioning that Dalio calls the search for "radical truth" creates a culture that is not only demoralizing but makes it just plain difficult to get things done, according to former employees.

Bridgewater attracts, and keeps, few hedge fund stars. But a crew of about 1,100 employees—including many young men and women who churn out research and algorithms that back trading ideas coming from the top—toil at the firm’s only location, a small corporate campus in Westport, Connecticut. Most are housed in a midcentury modern fieldstone and glass building nestled in the woods; however, Bridgewater’s huge growth has forced a number of employees to work in nearby buildings. Assets have grown 25% annually during the past decade; headcount has increased elevenfold since 2000.

Dalio is defensive about the criticism his principles have received and defines the firm as a "community," not a cult. "It’s not just a paycheck and a job," says the billionaire manager. "There’s a mission here that people are on that they feel good about what they’re doing...And those two things together—that meaningful work and those meaningful relationships—is what produces the results that we have for our clients."

A number of former employees spoke to AR only on the promise of total anonymity about their experiences because of legal agreements with Bridgewater. Some scoff at the suggestion that anyone goes to work there for any reason other than the hefty compensation, which can more than double one’s prior earnings. "The money is the draw," says a former executive. Dalio of course has become fabulously wealthy. In 2009, even when Pure Alpha’s flagship netted investors 1.91%, he still made AR’s Rich List, earning approximately $400 million. Last year, he made about $3 billion, according to AR’s upcoming Rich List.

David McCormick (center) and Greg Jensen (right): Bridgewater’s co-CEOs

In addition to Dalio, the brain trust that makes investment decisions includes silver-tongued co-CIO Bob Prince, who joined the firm in 1986 from an Oklahoma bank, and cerebral co-CEO and co-CIO Greg Jensen, who came in 1996 straight out of Dartmouth College and rose quickly to the top. Bridgewater is a macro shop, and Dalio, in consultation with Prince and Jensen, is the power behind the trading decisions. But marketing Bridgewater’s machine has struck a chord with many institutional investors, who like the systematic approach it promises.

In a recent interview with AR, Prince and Jensen went on at length about the process that informs the investment decisions. Strip away the jargon, and it appears to be little more than the commonsense methodology of testing hypotheses with mountains of research and looking at the big picture instead of the minutiae. "People overfocus on 'What do I do today? What trade do I make?’ We focus on 'How does it work? How does the world work?’ " says Prince.

The three like to point to Bridgewater’s diversification as a key to its performance—not an unusual stance for a statistical manager with more than 100 positions. But because of Bridgewater’s size, most of the money is made in just a few big markets. In 2009 Pure Alpha’s poor performance during a huge global market rally indicates that diversification can’t always protect it either.

Bridgewater tends to do better during periods of crisis (1998, 2003, 2008), and last year, Bridgewater hit on all cylinders. "We made money in every asset class we trade," notes Prince. At midyear, some of Pure Alpha’s top bets included a long yen/short euro position and German bunds—both trades where it benefited from its analysis that Europe’s credit problems would worsen. In the United States, Bridgewater was long short-term U.S. rates, benefiting from the weakening of U.S. growth. At the same time, by last March, Bridgewater was calling gold a currency, and a long gold position added to returns. (For the firm’s current views, see "The view from Westport," p. 32.) Pure Alpha 18% lost money in November—the month that the bond market began tanking—but it quickly recovered by the end of the year, gaining 8.3% in December alone. It lost 2.24% in January.

The firm churns out voluminous research reports on big-picture ideas, sends out e-mails called "Daily Observations" and otherwise engages in an inordinate amount of hand-holding for some 300 clients. It works: Institutional investors love the place.

Bridgewater may be given credit for helping institutionalize the investor base of hedge funds, and it has savvily exploited the trend during the past decade with years of solid, not flashy, returns. Before fees, the flagship lost money in only one year, but on a net basis, it has lost investors money in three years since inception, according to the AR database. It boasts an impressive 18% annualized return since 1991.

"What we’re trying to do here is to pursue truth at all costs," says Prince. "That is a way of thinking and being that’s very different than a lot of places."

The pursuit of truth is what Bridgewater is renowned for. But not everyone buys it. "What they really do is have a dominating view of the way things are done and that predicates any search for truth," says another former employee, who likened the language used at Bridgewater to "newspeak," a reference to George Orwell’s totalitarian nightmare, "Nineteen Eighty-Four."

DALIO says making a lot of money has never motivated him. But like many a driven entrepreneur, he grew up with little. "I have been very lucky because I have had the opportunity to see what it’s like to have little or no money and what it’s like to have a lot of it," he writes in the "Principles." Beyond being able to cover the basics, he says, wealth isn’t that important.

Raised on Long Island the son of a homemaker and a jazz musician, Dalio has admitted being a poor student as a youth. He says he is better at conceptualizing than being precise.

Hearing him speak or answer a question can be a frustrating endeavor; he has a tendency to ramble and make provocative statements. In an interview with AR, for example, he asked, "Do we have more of a free market economy than China?" (He isn’t sure the answer is yes.)

Greg Jensen and Ray Dalio: Do we have more of a free market than China?

After getting a degree in finance at Long Island University in 1971, Dalio then went to Harvard University, where he received an MBA in 1973. By 1974, he had been hired as the head of futures at Shearson Hayden Stone, the firm Sandy Weill would use as the initial building block of his Wall Street empire. Upon being fired for insubordination, Dalio decided to start Bridgewater.

Dalio didn’t start off managing money; he sold a daily market commentary letter (a precursor to the "Observations") and also offered risk management services for corporations.

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