Industry gadflies had whispered it for years.
Prime brokers had questioned over beers whom they traded through. Bankers, perhaps grouchy that they were, finally, passé, claimed over lunch that their returns didn’t add up. Journalists, hungry to make a name as the next Woodward, begged their recalcitrant editors — me included — to let them investigate. “If we publish that, you either win a Pulitzer or you bankrupt this company,” was my stock response.
Jim Grant, on the other hand, just went out and did it.
The legendary Grant, author of his eponymous Interest Rate Observer, on October 6 published in PDF form what may have been the most irresponsible thing he’d ever written. “Many are the mysteries and contradictions of the world’s largest hedge fund,” Grant wrote of Ray Dalio’s Bridgewater Associates. “On the one hand, the man who displaces George Soros at the top of the heap as the all-time new money-maker, as Dalio is said to have done in 2015, is allowed to tape-record all the meetings he wants… On the other hand, if that same man, in a setting of mediocre returns and declining assets under management, chooses to persist in tape-recording his meetings, people may start to wonder if something isn’t off. We say that something is.”
What followed was a jaw-dropping litany of accusations. Bridgewater “lends money to its auditor, KMPG” (sic), an alleged arrangement Grant found troubling. “Many of the Bank of New York Mellon employees working on the Bridgewater account are, in fact, former Bridgewater employees”, which on the surface could be a conflict, Grant inferred. “Only two of [Bridgewater’s] 33 funds have relationships with prime brokers,” which to Grant seemed unusual, and so on.
Subscriptions to the Interest Rate Observer skyrocketed, according to a straw-poll of new readers. Grant, Bridgewater skeptics said, had finally done it, had written what others like the New York Times had only hinted at.
The problem: He was all wrong.
Somewhat shockingly, it took almost a week for Jim Grant’s world to collapse. But by the Friday after publication, Bloomberg’s Matt Levine wrote a blistering take-down of Grant’s attempted take-down, titled “The Case Against Bridgewater Isn’t Proven.” Institutional Investor’s own Amanda Cantrell was the first journalist to get Bridgewater’s official response to Grant’s piece, which it called “inaccurate and misinformed,” among other things.
Later that day, Grant gave up the fight — sort of. Dialing in live to CNBC, the author admitted that at least part of his analysis was in error. “We were wrong,” he said. “We were wrong to question the relationship between the auditor… and Bridgewater. We were wrong to suggest Bridgewater’s former employees, who’d gone to work at Bank of New York Mellon, were serving two masters. Bridgewater is a secretive and eccentric firm, and I let my suspicions of that get in the way of our ordinarily comprehensive due diligence at Grant’s.” He refused to recant his opinion that a distracted Dalio would be the face of the next financial crisis.
I don’t know how lucrative the PDF newsletter business is these days, but even as its best Bridgewater Associates could bankrupt Grant many times over. Instead, the company seems to have moved on. (Bridgewater did not return a request for comment as of publication time.)
The root causes of Grant’s problems were twofold: He seemingly does not understand how hedge fund disclosure forms work, and he at least temporarily forgot how journalism works. The first one is forgivable, if revealing. The second is destructive not only to Jim Grant, but to all of us who want to know more about how the world’s largest, and often secretive, hedge funds work. (Grant, when asked for comment, was as gracious as can be: “There’s no excuse for the errors we committed, and I won’t offer any,” he wrote. He also pointed to a retraction printed in a later edition of his newsletter.)
Bridgewater, along with Two Sigma, Renaissance Technology, and almost every quant-driven hedge fund — hell, most hedge funds in general — are cagey. If you knew what they knew, they wouldn’t be charging you 2 and 20.
But Ray Dalio did something unusual for a (non-activist) hedge fund manager in the past two months: He put himself out there. He’s been on CNBC. He’s been on our War Stories Over Board Games video series. He’s sat for interviews with every industry publication you can think of, and he’s cooperated with a profile in Wired. All of this is very normal for someone promoting a new book, as Dalio has been with Principles, which lays out the firm’s management philosophy.
Grant likely would never have written his specious article if Dalio hadn’t been so public in months past. He basically admits as much in the opening: “Distraction, sycophancy, mystery and, of course, interest rates are the topic at hand,” he wrote. “In preview, Grant’s is bearish on the world’s biggest and most client-enriching hedge fund organization.”
Let’s hope that Grant’s folly doesn’t stop Dalio, and others, from opening their doors to millions of curious minds who wonder how they actually do it, and who they really are.
Full disclosure: Bridgewater Associates is one of hundreds of asset management companies that pays to attend Institutional Investor events.