|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.
Prince remembers getting the research when he was running the treasury department of the Banks of MidAmerica in Tulsa, Oklahoma. “I was 24 years old ... and I needed some help, and kind of by chance happened to see some Bridgewater research,” he recalls. Prince was working with David Moffett, who would later become CEO of Freddie Mac. “David knew more about economics than I did, and he read this thing that Ray wrote and said, ‘That’s the best thing I’ve ever read on how the economy works.’ ”
The bank hired Bridgewater. “I paid them $18,000 a year, and they would plot charts for me and numbers, and I’d get on the phone and brainstorm. I got to know Ray through that process.” After the bank went through a merger three years later, Prince joined Bridgewater and has been there ever since.
In the early days, the firm was even more casual than it is now, says Prince, who was wearing a pullover sweater and corduroys on the day of the AR interview. “We used to wear jeans and T-shirts every day, and Ray would sit at his desk with his pipe and his stocking feet. There was one time I was in a meeting like this with a client, and the dog came running into the room, and then the client said, ‘Oh, that’s all right! I love dogs!’ It was very relaxed.”
The first client for whom Bridgewater managed money was the World Bank. The CIO for its pension investment division, Hilda Ochoa-Brillembourg, hired the firm to manage a $5 million bond account in 1985. “She would read our thoughts about the markets and she thought, ‘Hey, you guys are smart guys.’ So really, the thoughts preceded the products,” explains Prince. By the end of 2009, public pension funds accounted for 30% of the assets under management, followed by corporate accounts at 24%, and governments and supranationals (sovereign wealth funds) at 23%, according to Bridgewater.
“If you go back 15 years, the way that institutions hired managers, they didn’t hire people to do everything,” says Prince. When clients hired Bridgewater, “they thought of themselves as hiring a bond manager. They would give us a benchmark that was an even aggregate or something like that and say, now go beat that benchmark. But you could only trade bonds to beat that benchmark.”
Primarily using derivatives, it bought the benchmark and used the leftover cash to invest in the appropriate asset class. Bridgewater began offering currency overlay products in 1990; the global bond overlay was introduced in 1992. In 1991, Bridgewater began marketing what became known as portable alpha, which Bridgewater called an “alpha overlay.” At that time, Bridgewater began using the excess cash to invest in its new Pure Alpha hedge fund, which gave the firm more investing discretion. The strategy took off after the markets crashed between 2000 and 2003, and hedge funds gained traction with the type of underfunded pension funds that were among Bridgewater’s clientele.
Portable alpha got a bad name during the 2008 financial crisis because many institutional investors lost money in the hedge fund portion of it when those strategies tanked. The leverage attached to portable alpha compounded their woes. Since Bridgewater did so well in 2008, its portable alpha programs survived and today account for about 40% of the assets in the Pure Alpha funds.
Prince says Bridgewater didn’t anticipate the institutionalization of the hedge fund world. It simply started off managing money for institutions in a hedge fund fashion before the term was being used. “Our clients were institutional, and we educated our clients on this separation of alpha and beta. And we educated our clients on hedge funds,” he explains. “We got them to do it.”
In 1996, Bridgewater opened up its All Weather portfolio (previously a Dalio family trust) to investors. That fund charges no incentive fee and a management fee of 50 basis points or less, depending on the size of the investment. In 2006, the firm stopped running long-only money, and its assets under management fell from $165 billion to $75 billion by 2009. The hedge fund also suffered some redemptions during the 2008 crash, but assets didn’t fall significantly. The $165 billion was a notional number that included leverage, which isn’t included in today’s numbers. Bridgewater also closed Pure Alpha to new money in 2006. Last year it started a new hedge fund, Pure Alpha Major Markets, that took in $3 billion, all if it from Bridgewater investors that wished to reinvest their gains from Pure Alpha.
BRIDGEWATER’S focus on institutional investors long before other hedge funds were courting them propelled the firm’s rise to the top, but that could not have occurred without Dalio’s genius for marketing.
The availability of Bridgewater staffers to clients puts most large hedge funds to shame. In an industry that often gets away with vague quarterly letters and twice-yearly conference calls, Bridgewater inundates clients with data.
The centerpiece of Bridgewater’s outreach efforts remains the firm’s “Daily Observations,” which was one of the most widely forwarded pieces of market analysis once e-mail distribution began. Although a daily, the newsletter can rival other hedge funds’ quarterly letters in length and is usually packed with charts and data. One Dalio-written edition from January 11, 2010, “The New Decade—2010–2019: Putting It in Perspective,” was 43 pages long.
The “Observations” have become famous. Bridgewater boasted in a recent due diligence questionnaire that the daily reports are read by “members of the U.S. Treasury, the Executive Office of the President of the United States and many central bankers around the world.”
And readers love getting them. “I read ‘Daily Observations’ every single day,” says Michael Rosen, CIO at consultant Angeles Investment Advisors in Santa Monica, California, who has recommended Bridgewater to clients and has gotten the newsletter for years. “That gives me a lot of confidence that they’re doing research and work at a breadth and depth that very few come close to.”
The “Observations” help create a relationship, notes Prince. “It creates an intellectual exchange. When our people go out and they have a conversation, they’re having a conversation with the chief investment officer. And the conversation is about what’s going on in the world, what’s going on in the economy? How should I structure my portfolio? What do you guys think about tail hedging? There’s a respect because we’ve built an intellectual relationship with a decision maker, and they then look to us for insight.”
Bridgewater also produces a monthly market commentary, a quarterly letter, and an annual strategic report that review recent market developments and performance and discuss the firm’s economic outlook. There are also quarterly conference calls and white papers for institutional investors on various investment strategies and asset classes.
The monthly and quarterly reports include how performance compares with expectations for the respective Pure Alpha funds and a detailed list of comparative returns for major asset classes and traditional and alternative asset managers. The second quarter 2010 report, for example, details 46 winning positions and 42 losers in a chart showing “Gross Value Added Attribution by Market.
“The Pure Alpha fund had a positive return this quarter,” it says, before giving more than 30 pages of market commentary. “We had a similar number of winning and losing positions, but our average winner was about twice the size of our average loser.”
“The strategy is more understandable,” says Karim Leguel, managing director of Rasini Fairway Capital, a London fund of funds that has a private bank client in Pure Alpha. That’s especially in contrast to others. “You understand why they are making money and losing money better than you’ll ever understand many of Bridgewater’s quant and macro competitors. That gives you certain comfort.”
There are 130 client service representatives catering to the 300 investors Bridgewater serves. “There aren’t a lot of institutional managers who have as polished and as good an effort as Bridgewater,” says Daniel Celeghin, a partner at management consultant Casey, Quirk & Associates and industry observer. “It’s not about razzle-dazzle ... It’s about treating clients with a lot of respect and coming to them as partners.”
Celeghin estimates that most hedge fund managers with assets of $10 billion or more have fewer than 10 full-time client-facing staff, accounting for between 2% and 4% of total head count. If Celeghin’s industry estimates are correct, that makes Bridgewater’s client-facing staff—which comes to 12% of employees—an industry leader.
Each client is assigned to an adviser, who regularly meets with investors to “discuss portfolio performance, provide updates on recent research, and help develop strategies that best meet their needs,” Bridgewater explains in its due diligence questionnaire.
Those advisers, for example, can help the investment staff of a public pension prepare for their big investment update meeting, or even participate in it. There’s also a client service analytics team whose sole function is to “help our clients solve their most important investment problems,” according to the due diligence questionnaire.
That includes access to a proprietary Web-based “Risk Budgeting Tool” to input various investments—including other hedge funds—to check if the returns and risk match goals and expectations. Bridgewater is not giving advice on competitors, but a way for clients to see how All Weather’s alpha and beta separation principles hold up in the rest of a client’s portfolio.
“We look at them as a strategic partner to the fund and use their insights to assist us in managing our portfolio,” says Jim Grossman, managing director of external public markets, risk and compliance with the Pennsylvania Public School Employees’ Retirement System, which has approximately $1.9 billion with Bridgewater.
Grossman says the pension fund took off its non-U.S. equity currency hedge in March 2009 after consulting with a Bridgewater client team during a routine call. The fund had its non-U.S. equity exposure 30% hedged back to the U.S. dollar, but Bridgewater believed that the dollar would weaken. This convinced the management team at the fund to take the hedge ratio to zero. The advice proved wise as the dollar declined approximately 9% versus a basket of foreign currencies during the remainder of 2009. The move saved the fund hundreds of millions of dollars.
THE brilliance of Bridgewater’s trading ideas and its exceptional marketing would be enough to make the firm a huge success. But why did Dalio find it necessary to create such a controversial culture—and codify it in a book that is so easily lambasted?
Some former Bridgewater executives think the firm’s rapid growth forced Dalio to try to institutionalize what worked when Bridgewater was a small group of individuals. And while his indefatigable search for truth may be successful in the investment sphere, it isn’t as applicable to managing human beings, they argue.
Dalio’s principles are a mix of homespun sayings, management maxims—and psychological techniques that are quite harsh. “Trust in truth” is critical to good management, he’ll say. Or, “Pay for the person, not for the job.”
Dalio conceived a long list of such axioms while building Bridgewater. They would come to him suddenly when observing something at the office, Prince remembers, and Dalio would whip out his BlackBerry in the middle of a meeting to jot down his thoughts. Then he’d pause the group and explain: “Okay, this is what’s going on. When this happens, this usually happens.”
Roughly six years ago, Dalio started compiling those thoughts and then worked with someone to organize them into a more formal document. After several years of review, “he basically hit the print button, and this stuff came out,” says Prince.
What emerged was a 110-page document with 277 principles for work at Bridgewater—and for life in general. Dalio wrote in the introduction that the document is akin to the U.S. constitution: “a written expression of principles that defines how we will be with each other in order to live out our agreed upon values.”
Dalio’s philosophy is hard to pin down, and he doesn’t like to discuss the influences on his thinking. Dalio is a practitioner of Transcendental Meditation, to which he has donated a lot of money. (Practiced by celebrities such as the Beatles and film director David Lynch, TM is a type of meditation backed by a large business enterprise that is considered by critics something like a cult—though a benign one.)
Dalio is also a free-market enthusiast who says he isn’t that interested in politics. He supported Republican senator John McCain for president in 2008 and has hired two George W. Bush administration execs in high positions. In contrast to many in the hedge fund world, however, he has had high praise for the efforts of both President Barack Obama and Federal Reserve Chairman Ben Bernanke in keeping the country from falling into a major depression. (“I believe that the administration by and large was correct in needing to have fiscal stimulation when the private sector was not spending,” says Dalio.)
Dalio’s principles are his own and appear unique to American business, according to management experts, but there’s no denying their resemblance to other grand social theories. The emphasis on tearing down an individual’s ego hints at the so-called struggle groups of Maoism; an overreaching for human perfection devoid of emotion resembles the fantasy world described in Ayn Rand’s “The Fountainhead.”
Dalio makes it sound so reasonable. “As you can see, I believe that most of the impediments to success are emotional,” Dalio writes in “Principles.” “You can probably get what you want out of life if you can suspend your ego and take a no-excuses approach to achieving your goals with open-mindedness, determination and courage.”
Trying to take egos out of individuals who work at hedge funds is a tall order, but Dalio seems obsessed with it. The word “ego” pops up more than 20 times in “Principles.” The most distinguishing—and controversial—characteristic of Dalio’s management is that employees are encouraged to criticize one another in the quest for what Dalio calls “radical truth” and “radical transparency.”
“In a philosophical sense, you have a hard time disagreeing,” says a former employee who says he went to work at Bridgewater “before the word was out” about its culture. “The problem is how it is implemented.”
Central to the questioning are “issue logs” that lead to “drilldowns,” sessions where employees are “probed” about their work. But the focus is on an individual’s flaws and mistakes rather than a balance between positives and negatives, according to former employees. And despite much analysis of what is wrong, it’s rare that the cause of the problem is fixed, they say. That could be because the criticisms are often personal. “What you see at Bridgewater is a bunch of people practicing armchair psychology,” says one former executive. “You have a bunch of 23 and 24-year-olds running around supposedly diagnosing problems that I wouldn’t trust someone with a PhD in psychology to do.”
Bridgewater believes that looking at mistakes and weaknesses objectively is the key to its success. But the constant drumbeat of criticism is the main reason former employees cite for their departure. “It hits your confidence level after a while,” says one. Dalio’s “model is flawed because it denies human nature,” this former employee says, adding that the people who succeed at Bridgewater “are not afraid to get in your face. They believe you should have no emotion in anything you do. For many, because we’re all human beings, it’s a hard thing to get used to.”
Says another: “What [Dalio] doesn’t understand is that if you kick a dog enough...[the dog] curls up and just whimpers. And he kicks pretty hard.”
These former employees say the environment is not the open, democratic one that the principles espouse. In reality, they say, it is highly controlled and hierarchical. “[Everyone is] supposed to speak up as long as it doesn’t confront Ray directly,” adds this former employee, who also says those close to Dalio aren’t criticized in the same brutal fashion as others.
In research meetings, for example, only some people can talk; others have to listen. The firm recently introduced a “believability matrix” to determine whose opinions matter, a tacit acknowledgment that the free-for-all has been counterproductive.
To many, Ray Dalio is just paranoid, and there’s evidence to suggest that is the case. Employees aren’t allowed to talk behind others’ backs; every phone conversation is taped and monitored constantly. (Bridgewater claims this is part of its interest in being transparent.) Remarkably for a hedge fund of its size and global reach, Bridgewater has only one location, which facilitates such oversight.
Last May, “Principles” was leaked to Wall Street gossip site Dealbreaker.com, which featured a slew of negative comments about the culture under the title “Bridgewater Associates: Be The Hyena. Attack The Wildebeest,” a reference to a line in “Principles.” Dalio says that was taken out of context. “I wasn’t making a comment about social Darwinism with that. I had no comment about it. I was just thinking that if you didn’t have that natural selection as part of the process, you’d have a worse outcome, not a better outcome.”
A number of other media outlets then lambasted Dalio, including the Financial Times. “Ray Dalio is deluded, insensitive, emotionally illiterate, simplistic, breathtakingly smug, weird and plain wrong,” wrote columnist Lucy Kellaway. Steven Bell of UK hedge fund GLC said on a BBC radio show: “I think someone’s got a bit of a megalomaniac trait if they’re starting to ban [gossip].”
Dalio’s principles are now enshrined in the blogosphere, where former employees have called Bridgewater’s culture “sinister,” “eerie,” and cultlike, among other things. (“Principles” is now available to the public on Bridgewater’s website.)
“My fundamental belief is that Bridgewater is a cult,” says a former executive. “It’s isolated, it has a charismatic leader and it has its own dogma.” It was so stressful, he recalls, that one employee couldn’t sleep all night and then, in the morning, threw up before meetings with Dalio. (The incident could not be confirmed.)
But sniping from disenchanted former employees that Dalio has turned Bridgewater into a cult may be an exaggeration. “Dalio’s ‘Principles’ show he’s egotistic, long-winded, and something of a control freak, but Bridgewater does not seem to be anything close to a cult,” says Ben Zablocki, a Rutgers University sociology professor and expert on cults.
Clients are sanguine about the brouhaha. “It wouldn’t be the kind of environment that I would want to work at, but it’s definitely the environment that I want my investment manager to be in,” says Robin Diamonte, the chief investment officer at United Technologies, who has a longstanding relationship with Bridgewater and invests more than $1 billion there. “They are a lot of dedicated, bright, quantitative people who challenge each other. That is the key to their success—it’s not about power or asset gathering. It’s more about being right, having the best ideas and collectively putting them together.”
That’s the image presented to clients, but it’s not the entire reality, say former employees. Many Bridgewater staffers are smart liberal arts graduates in their 20s who have managed to get through a rigorous screening process in which they are asked their views on such topics as abortion and God. The firm also makes prospective employees take the Myers-Briggs personality test. (Dalio is an ENTP, which stands for extraverted, intuitive, thinking and perceiving. ENTPs are often considered innovators or visionaries.)
With little other work experience, young hires can more easily be indoctrinated into the principles. But some who’ve left say the work can be boring and tedious, focused on specific tasks that don’t provide a broad sense of the investment strategy each cog feeds into.
One former executive says the forthrightness and criticism typically aren’t applied to the ideas that surround investments, but to insignificant operational issues, such as who does what and when. He thinks that the constant questioning also stifles creativity. “It’s not what it appears to be. It’s like what occurs with communism or any other system: It looks better on paper than when you observe it in practice.”
Another common complaint is the bureacracy created by the constant challenges. “Getting stuff done takes forever because everyone has a say in what you do,” says one former employee who left after less than a year.
Bridgewater says that asking former employees of a company what the place is like is a bit like asking divorcees what their spouse is like. The firm suggests people judge for themselves by looking at its 36-year track record—at how much it has gotten done and how creative it has been.
The firm has also acknowledged that the place is not for everyone. During their first two years, about 30% of Bridgewater’s employees quit or are fired, which is leading the firm to “reengineer their talent acquisition process,” says one individual aware of the situation.
“A turnover rate of 30% is highly unusual for large hedge fund firms like Bridgewater,” says Adam Herz, president of Hunter Advisors, an executive search firm specializing in alternatives. “Most other large managers only see employee turnover in the neighborhood of 10% of people leaving in the first year or two.”
Because of both its growth and the revolving door, Bridgewater appears to have the most massive recruiting effort in the industry, according to those familiar with its efforts internally and externally. Last year’s media exposure of the culture has made that task more difficult. Even senior staffers inside Bridgewater who are “culture carriers, so to speak, and walk the walk and talk the talk are out in the market looking for jobs,” says one individual with knowledge of the situation.
Bridgewater’s recent due diligence questionnaire noted that research, trading and client service analytics professionals worked an average of only three years at Bridgewater. It also stated that the firm resolved two complaints brought by former employees (in 2007 and 2008), in 2009 defended an arbitration action regarding employment issues and is the subject of two pending Equal Employment Opportunity Commission actions, both of which the firm says are nonmaterial.
In contrast to what the former employees say, Bridgewater goes to great lengths to show that even low-level employees are able to criticize the top ranks. Dalio sent an e-mail to Bridgewater staffers in early January asking for feedback on what to improve about himself. “Below is a list of weaknesses that I think I have,” he wrote, listing things like “impatience” and doing “detail, precision tasks.” He then said, “I’d of course love to get from people who know me those that you think that I’m missing.”
Examples of the responses provided to AR include one from Jennifer Pelzel, a 2006 Princeton alumna and management team member who wrote a bulleted 10-section response. Number eight was “seemingly doing things on a whim with inadequate follow through,” in which she detailed how Dalio “will have random thoughts and then ask for people to go spend a lot of time doing them and I question the value of that and if those things are thought through in a good way before executing.”
Hedge funds are known to be tough workplaces, where yelling is common. But the management culture at Bridgewater remains unique and flies in the face of accepted practice of mentoring and motivating employees for optimal results. Jeff Sonnenfeld, a professor and associate dean at Yale University’s school of management, says Bridgewater’s culture of constant criticism is highly unusual. “While it is wise to fight complacency with constructive criticism, the focus on an individual’s faults runs counter to the consensus management view that positive feedback is a better motivator than negative,” he says.
Several senior executives found the environment uncomfortable and left after short stints. One was Britt Harris, who had been president of Verizon Investment Management and joined Bridgewater as chief executive officer in early 2005. He quit by June of that year, reportedly because of the culture. Harris, now chief investment officer of Teacher Retirement System of Texas, wouldn’t comment on his departure.
Another high-level departure was Hope Woodhouse. A veteran of Salomon Brothers, Tiger Management and Soros Funds Management, she left after being the chief operating officer from August 2005 to January 2009. Woodhouse declined to comment, but her “resignation was reached with mutual understanding due to Hope’s challenges of operating in the Bridgewater culture,” Dalio wrote in a letter to investors in 2008, according to Pensions & Investments.
Risk management expert Rick Bookstaber lasted less than a year too. He joined Bridgewater in late 2007 after running the Quantitative Equity Fund at FrontPoint Partners. Now a senior policy adviser at the Securities and Exchange Commission, Bookstaber declined to comment.
LinkedIn contains plenty of mid- to senior-level Bridgewater employees who left recently after a short tenure. Examples include Brian Davis, a senior management associate (one year); Daniel de Faro Adamson, who served on the firm’s operating committee (one year); Svilen Ivanov, director of trading (two years); Thomas Sy, a management consultant at Bridgewater (13 months); Yie-Hsin Hung, a management committee advis0r (two years); and Ted Yang, deputy to the chief technology officer (two years three months). All declined or did not respond to requests for comment.
Bridgewater has hired numerous recruitment firms, and a new head of recruiting, Jeff Hunter, started in January, according to LinkedIn. But there’s been recent high turnover even in that department, according to the same site: Andrea Tolchinsky, manager of professional staff recruitment; Deborah Damesek, a recruiting manager; and Rob Dennis, head of technology recruiting, have all left recently. (None would comment.)
Investors aren’t worried. “If there’s high turnover, we haven’t noticed it. We’ve been very impressed by their client service,” says Bob Jacksha, chief investment officer for the New Mexico Educational Retirement Board, which has $450 million, or 5% of assets, in Pure Alpha and All Weather.
Bridgewater features 25 glowing profiles of life at the firm from mostly junior and midlevel employees on the career page of its website. “How could I not want to work in a truly flat place filled with creative people who were all driven to understand the world better than everyone else?” says “David,” a management associate in the administration division.
Not everyone who leaves thinks it’s a horrible place, either. “It was the best first job I ever could have had. Not only did I learn a ton about investing, but I learned a lot about managing a business and a lot about people. They gave me responsibility as fast as I could handle it,” says Tom Mucha, who worked at Bridgewater from 2003 to 2007 and left because he didn’t want to work in Connecticut.
Mucha also says Dalio truly cares about his employees. For example, Dalio helped coordinate medical care for a Mucha family member when Mucha wrote an e-mail to the Bridgewater founder asking for help, not knowing where else to turn. Dalio recommended a doctor and made sure the relative got an appointment. “It was very kind,” recalls Mucha. “From the outside, the principles can make Bridgewater seem harshly efficient, but Dalio is personally very caring.”
|Bridgewater’s Management Committee and Client Service Management team meet to discuss the 2011 plan|
WHAT does the future hold for Bridgewater? Last year, Dalio began to vastly expand its management committee, part of a 10-year plan to “transition Ray’s CEO responsibilities,” the firm explained in its 2010 year-end letter to investors. In addition to having two co-CIOs, Bridgewater in 2010 named two co-CEOs. Jensen is both a co-CIO and co-CEO. The other co-CEO is David McCormick, who joined in 2009, having previously served as the Treasury Department’s undersecretary for international affairs in the George W. Bush administration.
The financial collapse of 2008 appears to have benefited Bridgewater in more ways than one. Many on its newly expanded management committee previously held jobs in environments much different from Bridgewater’s: the corporate and banking world decimated by the crash.
Eileen Murray joined in 2009 from Morgan Stanley, where she was controller and treasurer, among other positions. Joe Parsons joined from GE in 2010, Jim Comey was general counsel at Lockheed Martin until 2010 and had been deputy attorney general in the recent Bush administration, and Tony Murphy had been the CEO of HSBC’s global banking and markets in the Americas before joining last year. Osman Nalbantoglu joined in 2008 as the senior manager for account management. He was previously a partner with McKinsey & Co., as was McCormick.
Dalio, Prince and Jensen remain the key players. “Bridgewater’s senior investment professionals are collectively responsible for our portfolios and can cover for one another when needed,” the due diligence questionnaire states. “Additionally, being systemized means that our expertise is not concentrated within one individual. We work to embed any ideas around our investment research and portfolios into an explicitly laid-out system. As a result, the loss of a single team member would not affect our existing process in a material way.”
All this seems designed to prepare for the eventual departure of Dalio, although that could be many years away. Dalio says he wants to remain an investor at Bridgewater because that’s his “passion” but adds that he wants to turn over the management of the company to others.
Dalio’s appearance raises questions about his health. Until recently, he was a tall, heavyset man with the look of an outdoorsman in publicly available photos. But weight loss seems to have aged him. People at the firm say that he went on a big-weight loss program and that he has never been in better shape.
Before Dalio sold 20% of his equity, Prince held the most shares—somewhere between 10% and 25%, according to its most recent filing with the SEC. Other executives with less than 5% include Jensen; McCormick; Murray; Randal Sandler, director of client service and marketing; Peter LaTronica, vice president; and Helene Glotzer, chief compliance officer.
For Dalio, who has four sons and lives with his wife, Barbara, in Greenwich, Connecticut, money has ceased to have any additional marginal utility, as he puts it. “I love the game . . . It’s a test of me, and it makes me work harder, and it makes my mind sharper and all of those kinds of things,” he says.
He points to his charitable endeavors as evidence that money doesn’t matter. During the past three years, Dalio and his family foundation have given more than $65 million to hundreds of charities, according to Bridgewater. One of the main recipients is David Lynch’s Transcendental Meditation group, to which Dalio gave more than $1.25 million in 2008. (Dalio also helps pay for employees who want to study TM.)
Fact File: Bridgewater Associates
Flagship: Pure Alpha 18% Volatility
Assets: $87 billion (January 1, 2011)
Founder: Ray Dalio
Performance: 18% annualized since 1991
Office: Westport, Conn.
Dalio also designed a system that he says will keep Bridgewater from being sold. “It has to be an independent employee-owned or -controlled company,” he says, repeating his long-stated affirmation that he would never sell the firm or go public. Those statements would not preclude the sale of a minority stake, however.
Dalio says he doesn’t give most employees equity because “the notion of equity is trade it, flip it, not build it.” Selling Bridgewater would “ruin the culture,” and a new owner would only try to squeeze profits out of the firm, he says. So Dalio hands out what is called phantom equity. For every year individuals work at Bridgewater, they receive a dividend and continue to receive one each year after leaving Bridgewater for every year of employment.
Has Dalio really created a brave new hedge fund, with egoless individuals tirelessly challenging themselves to find objective investment truth? Even though the founder is trying to create a post-Dalio firm that will look exactly like the manager clients signed up with, the principles will lose their greatest practitioner and champion whenever he does leave. Some suggest that might be a good thing, given the dysfunctionality they think the principles have created. But when Dalio goes, Bridgewater will also lose the main intellect behind the firm’s success.
“He’s so much the company, I don’t know what will happen,” says a former senior executive. “He wants to teach people the principles and have them run the firm as their firm forever . . . but can he do it? That’s always the $64,000 question.”
Dalio inadvertently hinted at one possibility in the January e-mail to employees about his shortcomings. One of his weaknesses, Dalio wrote, was “believing that people are more like me than they are.”
Are they? That’s indeed the $64,000—or $87 billion—question.