Bridgewater is also the largest hedge fund manager globally by net assets under management of USD 97.2 billion in the annual P&I survey, a ranking based on the US regulatory definition assets under management, which includes some forms of leverage, and would make Millennium and Citadel larger as of 2023.

Bridgewater is additionally ranked as the largest foreign hedge fund manager in China, running 40 billion Yuan (over USD 5 billion), according to a Reuters article in January 2024. A Chinese Yuan currency version of Bridgewater’s All Weather Plus exists and there is also a Bridgewater China fund. Dalio views China’s equity markets as undervalued and admires its technological innovation and education system – indeed Dalio sent his son to study in Beijing for a year at the age of eleven.

Dalio’s own first tastes of financial trading came at a similar age: “In the 1960s I earned money from caddying and odd jobs, put it into some hot stocks and got hooked like a video game. Then in college I stayed playing commodities because I figured out that low margin requirements would let me use more leverage and make more money”.

Technical analysis became very fashionable for commodity trading in the 1970s, but Dalio disliked it and developed his own fundamental approach. “I wanted to understand the fundamental cause and effects of price action, based on crop reports, and so on, to profit from both trend following and choppy rangebound markets. In the 1970s, all financial markets were increasingly driven by macroeconomic variables such as interest rates and inflation, which shifted the perspectives needed to understand credit and currencies.”

After graduating with an MBA from Harvard Business School in 1973, he began working in commodities for Dominick & Dominick during the oil price shock. In 1975 after a disagreement with his boss, Dalio left Shearson Hayden Stone, but had built up a strong rapport with many institutional hedging clients. Their loyalty and some support from family friend, Wall Street financier George Leib, enabled him to set up his own consultancy firm out of a two-bedroom apartment. The research, which included publishing the Bridgewater Daily Observations, had a strong focus on commodities. Early clients included McDonalds and the World Bank pension fund, the first of many large pension funds and sovereign wealth funds to place their faith in Dalio.

Two formative experiences, before and after he launched Bridgewater, helped to shape Dalio’s systematic approach to investing. “In 1971, after Nixon ended the Gold Standard and devalued the US Dollar, I expected the end of money as we knew it would cause a crisis. In fact, the stock market was up rather than down, and I drew a historical analogy with Roosevelt on March 5, 1933.” And eleven years later, Dalio was also too hasty in doomsaying. In 1982, Dalio foresaw a debt crisis based on US banks having lent more to foreign countries than could be repaid. Mexico’s Tequila crisis did occur in August 1982, but in fact this marked the trough of the bear market as the Fed began easing policy. “My positioning lost money for clients, and I was then forced to borrow USD 4,000 from my father, let go of employees, and was uncertain if the business would survive. Nonetheless, the episode was a lesson in humility. I wanted to find the smartest people who disagreed with me, to reduce risks and diversify, and other smart people to help me systematize the investment process.”

Systematic fundamental

The discretionary criteria behind trades were steadily systematized into codified programs. Trading and decision rules were written down and back tested within fundamental systems. Views were expressed based on a matrix of macroeconomic regimes, such as rising or falling growth or inflation.  In the 1980s, systematic fundamental macro was a novel concept, and the process also defined statistical parameters. “We realized we did not want to have a drawdown greater than one third, because a 50% drawdown would require a 100% return for recovery, and a 75% drawdown would require a 300% recovery.” The firm sought to target a ratio of return to risk around one, using diversification. In fact, the worst drawdown on Pure Alpha at a 12% volatility target has been 13% in 2020, and there have been no other double-digit drawdowns. Importantly, returns, including the setback in late 2023, have often been uncorrelated with clients’ other investments.

Naturally a pure alpha strategy has no reason to keep pace with asset class beta in any year, and as assets grew the product range broadened out beyond pure alpha to include beta products such as the “all weather” risk parity product. Less volatile asset classes, such as bonds, were leveraged in proportion to their volatility in one of the first applications of risk parity. “Risk parity equalized the risk of different asset classes, to make them more comparable in terms of returns. If you borrow cash and buy bonds it becomes like buying stocks. And the average S&P 500 company is 2 times leveraged. Building blocks of comparable risk and return create a more balanced portfolio,” explains Dalio. Unlike some risk parity programs rigidly wedded to heavy bond weightings, Bridgewater’s adapted to new monetary policy regimes. “When interest rates reached zero, the approach needed to be rebalanced with less bonds,” recalls Dalio.

Organisational excellence

The firm grew to over 1,500 staff and with an emphasis on excellence not only in markets, but also in operations, compliance, client service, cybersecurity and so on. Dalio viewed this as a good partnership, and relationships were built up over many years of teamwork. Co-CIO Bob Prince has been with the firm for more than 36 years, co-CIO Greg Jensen for more than 26 years, and co-CIO Karen Karniol-Tambour for more than 17 years. Karniol-Tambour is one of many women at Bridgewater who have featured in The Hedge Fund Journal’s annual 50 Leading Women in Hedge Funds report published in association with EY. They include Co-Head of the Investment Engine, Erin Miles and Eileen Murray, who was COO and CEO at different times.

A very diverse team thrives on Bridgewater’s culture of “radical truthfulness and transparency” and an “idea meritocracy” where the best ideas from anywhere in the firm are adopted. These cultural frameworks seem highly distinguished but might not be quite as unique as sometimes suggested. The Hedge Fund Journal’s experience of interviewing many systematic and quantitative managers suggests that it is normal for the systematic research process to involve critical peer review inside firms, which can be similar to what happens in academia in a broader forum.

Similarly, it is not unusual to have manuals or handbooks listing principles, but Dalio’s principles are far more extensive both in their number – 375 – and their scope. The principles extend into personal, social and family life because Dalio believes in “meaningful work and meaningful relationships”, an ethos that is wholeheartedly embraced by many in the firm.

The principles touch on a huge variety of corporate management and psychology related topics including planning; decision and voting rights; organizational structure; reporting lines and communication protocols; governance; checks and balances precluding autocracy; decision rules based on hard data and evidence; prioritizing tasks; technological empowerment; effective delegation; efficient learning; cognitive dissonance; accepting mistakes; audit trails for decisions. Bridging the left- and right-hand sides of the brain, there are also prescriptions for appropriate and inappropriate emotional responses.

Behavioural biases and market paradigms

Dalio’s principles codify human biases, and the investment process also looks at human biases in terms of who is buying and selling, why and what their motivations are. “For instance, the bubble indicator gauges signals such as new investor groups in hot markets, leveraged buying, and emotional fads,” says Dalio, who judged that the “Mag 7” US mega cap tech stocks were not in bubble territory in February 2024, but equally not cheap.

Bridgewater views markets through the lens of behavioural and market paradigms, which often last around a decade. “The 1960s saw very low inflation and interest rates and by the 1970s everyone believed the opposite with very high inflation and interest rates, which then reversed again in the 1980s. In 2023 the world was leveraged long, and maybe too optimistic about inflation normalizing. There will be conflicts between creditors and debtors – interest rates high enough for creditors are too high for debtors. If bondholders sell bonds that could drive up rates and create a low real return environment,” warns Dalio, taking a longer-term view than most economists and market commentators.

Politics and investing

The 2010s saw very low nominal and real interest rates, as central banks printed money to buy assets, which increased in price. Profit margins also expanded and there were tax cuts, but Dalio views these as temporary factors, fearing that, “Profit margins may now contract – and taxes could go up rather than down”. He views the developing 2023 paradigm as being most analogous to the 1970s, with higher nominal and real interest rates providing more competition for risk asset pricing.

Dalio considers himself a hyperrealist and beyond economics and finance, he pays far more attention to politics and geopolitics than some systematic or quantitative investors: “International conflicts over the world order and trade wars can be very disruptive in their impact on taxes”.

Dalio has argued that China and the US have been at the brink of military war, though he revised this view to a different sort of war and regardless of geopolitics he sees internal conflict in the US.

“Domestic political polarization and arguments about wealth distribution are also important. Wealth and income inequality are at the highest, and social and economic mobility are at the lowest levels since the 1930s.”

Dalio deems investors too sanguine about politics: “Financial markets are not yet fully discounting or factoring in these variables – they are still focused more on earnings growth rates”.

Succession for the next 50 years

Dalio has been CEO, CIO and Chairman at various times, and is now Founder, CIO Mentor and Member of the Bridgewater Board of Directors. After 47 years, Dalio is confident about succession, in part because, “The ongoing systematisation of the investment process makes it less dependent on any one person. And teams have worked together for decades, depending on, and understanding each other”.

But in big picture terms, Dalio sees eye to eye with his proteges. “The culture of the organisation should provide its destiny for the next generations, driven by timeless and universal truths about economies and markets. To watch them succeed without me, and to help and mentor, is a great pleasure. To watch the third generation is like being a parent to a family. I don’t want to control them because they are independent and capable.”

“I have achieved something that few others have – starting in a two-bed apartment, the firm has institutionalised over 47 years, and I hope to pass it on. It should become a 100 year plus company.”

“At 74 years old I am happy to focus more on books, studies and philanthropy,” says Dalio, whose books, videos and apps have reached a readership of more than 150 million people.

Whereas some of the most successful hedge fund managers have turned their firms into family offices and stopped running client money, Dalio’s legacy at Bridgewater is a firm very much equipped to serve the world’s largest investors – and his family office is quite separate from Bridgewater. Dalio oversees The Dalio Family Office (DFO), which has offices in the US, Abu Dhabi’s Global Market, and Singapore. DFO supports the Dalio family’s investments, ventures and philanthropy.

Artificial intelligence

In answer to the question, what role can AI and machine learning play in the investment process, and how has that changed over time, Dalio answered: “I built Bridgewater to build AI directed systems for several decades, which has been the foundation of our success. AI, as it evolves has been, and will be more than ever, an amazing thought partner and, in many ways, thought leader in investment decision making. Decision making solely in one’s head, the way most investors still do it, is obsolete”.

Philanthropy

Dalio and his wife Barbara were in 2011 amongst the first hedge fund manager couples to have signed up to Bill Gates and Warren Buffet’s Giving Pledge – to give away most of their assets. Beyond Bridgewater’s corporate philanthropy, Dalio pursues personal philanthropy through The Dalio Foundation, set up in 2003, which became Dalio Philanthropies. It reportedly has more than USD 4 billion of assets and a board that has identified five focus areas: Education; Economic Empowerment; the Ocean; Health and Wellness and Arts and Community.

Readers should watch this space for Dalio’s final book on his economic and investment principles.