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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.