Dalio’s Quest to Outlive Himself
No book has resonated with Ray Dalio quite like Joseph Campbell’s The Hero With a Thousand Faces. The work, which Dalio’s second-oldest son, a filmmaker, gave him a few years ago, explores the archetypal hero’s journey—think of the myths of Prometheus and Odysseus—and his eventual return. “[T]he hero comes back from this mysterious adventure with the power to bestow boons on his fellow man,” Campbell wrote. Those words spoke to Dalio, the founder of the world’s largest hedge fund, who knew exactly what he wanted to pass along: his Principles.
The Principles are about 200 rules that Dalio, 68, has refined over the past four decades and began committing to paper during the mid-2000s. They outline a process for living and managing a business, often with banal catchphrases—“Don’t try to please everyone,” “Clearly assign responsibilities,” “Don’t bet too much on anything,” etc.—and include footnotes, flowcharts, and even a few doodles. The Principles, as Dalio has said before, are “being lived out” at Bridgewater Associates, where about 1,500 employees on the company’s pine-forested campus in Westport, Conn., must check their egos and speak their minds while managing $162 billion.
“I believe what we’ve done is magical, that it is wonderful,” says Dalio, who, wearing a blue-checked shirt that’s loose on his lanky frame, looks more Mister Rogers than Wall Street billionaire. He’s so full of energy at the beginning of our interview this summer that his hands tremble. Dalio says he hates the limelight, but he’s recently started tweeting, just gave a TED Talk, and will publish the Principles as a 600-page book for the first time this September. He’s also planning a second title that will detail his economic and investment principles, which he’s closely guarded for years.
“I believe in the idea-meritocratic process,” Dalio continues. “I believe in specifying one’s principles clearly. I believe in radical truth and radical transparency to achieve meaningful work and meaningful relationships. I wish it existed all over. I wish it existed in Washington. It’s the reason for our success—not me. I want to make it clear to pass it along, and then disappear.”
Before he can disappear, though, Dalio has a succession plan to see through. Even before reading Campbell’s book, he had initiated a decade-long transition to hand over Bridgewater’s reins and step out of the picture. (Dalio plans to relinquish his co-chairman title within the next five years, but he says he wants to be involved in the company’s investments until he dies.) As if that process weren’t daunting enough, the ultimate goal of Dalio’s successors is nothing short of monumental: not only to ensure that the firm’s culture lasts for the next 100 years but also that Bridgewater become an “everlasting institution.”
Although Dalio prizes his Principles, getting the world to accept his boon is another matter. Bridgewater isn’t for everyone. Most meetings are recorded. Employees must rate one another on one of about 75 attributes—some with funny-sounding names such as Designing the Movie Script and Willing to Touch the Nerve—about 15 times a week to create data to confirm that the right people are in the right jobs and to help them better interact with one another. Dalio says that as much as 30 percent of the population couldn’t tolerate a Bridgewater-esque environment.
To make sure everyone absorbs the Principles, new employees go through a three-week boot camp. Even long afterward, staffers have a weekly quota of homework that includes watching case studies and answering how they would solve a problem based on the rules. Their answers are compared with other employees and their ratings adjusted accordingly. That emphasis on reinforcing the company’s culture through technology is where things might get even more interesting. Dalio says he’s thinking about open-sourcing the computer code Bridgewater has developed, an artificial intelligence program dubbed PrincipleOS that does everything from summarize meetings to analyze reasons a person might be feeling anger, confusion, or embarrassment when interacting with a colleague. The programs could automate about three-quarters of Bridgewater’s management decisions within the next five years, according to the company.
Getting the right leadership team in place hasn’t been entirely smooth since the transition officially began in 2010, with the senior executive roles looking a bit like musical chairs. Dalio even briefly returned to day-to-day management last year following a disagreement among executives. The episode ended with longtime colleague Greg Jensen stepping down from his co-chief executive officer role, which he’d shared with Eileen Murray. Former Apple Inc. executive Jon Rubinstein was then hired as co-CEO to much fanfare, only to last about 10 months. Murray and David McCormick now run Bridgewater as co-CEOs. It’s McCormick’s second stint in the role. Early this year, he considered joining President Trump’s administration as deputy secretary of defense before opting to remain in Westport.
The transition comes as returns at the hedge fund’s flagship product have faltered, just like at other so-called macro managers. Since the beginning of 2012, Bridgewater’s Pure Alpha II has posted an annualized return of 2.5 percent, according to a document reviewed by Bloomberg Markets, a far cry from its historic average of 12 percent. It’s down 2.8 percent this year through July. (A smaller Bridgewater hedge fund, Pure Alpha Major Markets, has fared better, as has the company’s long-only product.)
Even a hardcore fan is concerned about performance. “Their returns have been unspectacular recently, and it makes you wonder if this is the beginning of the end,” says Michael Rosen, chief investment officer of Angeles Investment Advisors, who’s steered clients to Bridgewater since the early 2000s and prizes its research reports over others in the industry. “There’s only been one market cycle since the financial crisis, and so if this performance continues in the next cycle, then there may be cause for concern.”
Dalio is leaving nothing to chance. In Bridgewater’s glass-and-stone buildings, a 20-person team has been toiling for the past year on what until now has been a secret project: the company charter. If Dalio is the founding father and the Principles are the constitution, the charter will turn the latter into law. Setting them in stone guarantees that everything from who sets compensation to how the Principles can be changed is governed by a legal system.
All this work, the algos and the charter and getting the right management in place, is to help close what Bridgewater insiders call the Ray gap, or the difference between how Dalio has done things and how likely it is the staff he leaves behind can do the same.
That Dalio has become a billionaire contemplating Campbell’s hero myths might be surprising to those who knew him as a Long Island youngster. The son of a jazz musician and a homemaker, he was a poor student before eventually making his way to Harvard Business School. A few years later, he got fired from his job selling commodities futures at Sandy Weill’s Shearson Hayden Stone Inc. after having a stripper entertain his rancher clients at a conference; he also punched a department head in the face on New Year’s Eve.
Jobless, Dalio started Bridgewater in 1975 out of the second bedroom of his Manhattan apartment. Ever since he’s had a nose for steering his business toward ever more lucrative work. At first he advised companies on risk management. Then he managed bond and currency portfolios for them. (During the early days, he and Paul Tudor Jones, who’d also become a hedge fund legend, would sometimes discuss macroeconomic themes.)
Dalio’s views on the right way to manage money came after an investment experience in the early 1980s that almost sank him. He correctly forecast the Latin American debt crisis but wrongly predicted it would crush the U.S. economy and send stocks tumbling. The subsequent losses almost killed his business, and he was forced to borrow $4,000 from his father to meet household expenses. By 1991 he was back on track, opening his first hedge fund and charging clients 2 percent of assets and 20 percent of profits, which was soon to become the industry’s customary fee.
Still smarting from the wrong-way bet, Dalio slowly systematized his process and began codifying his investing principles, which he says keeps him from giving in to his biases or ego. The company eventually converted these into algorithms. Unlike quant shops, where computers find patterns amid market noise, Bridgewater takes a more old-school, macro approach to investing. Dalio, co-CIOs Jensen, 43, and Bob Prince, 58, and other team members start with an investment thesis—say, geopolitical risk leads to a rise in oil prices—and use copious back-testing to ensure the rule is timeless and universal. Only then do they add it to the algos, which spit out buys and sells across 150 liquid markets. If a wager doesn’t pay off (which happens about 35 percent to 40 percent of the time), they research what they missed. About 5 percent to 10 percent of algorithms are revised or added each year.
Bridgewater’s success matters more than most hedge funds because of its size. Along with the $83 billion in Pure Alpha investments, the company in 1996 was one of the first hedge funds to add a long-only strategy to its offerings with All Weather, which today oversees $56 billion. Bridgewater manages an additional $23 billion in its Optimal Portfolio that does a bit of both. About 350 of the largest institutions in the world, including sovereign wealth funds, central banks, and pension funds, have entrusted money to Bridgewater. Clients tend to concentrate their investments, too. Pennsylvania Public School Employees’ Retirement System, for instance, has invested almost one-tenth of its $53 billion in assets with the company. (It happens to mostly be in a passive inflation-indexed bond benchmark.) Two-thirds of investors have money in multiple funds.
Unlike other big hedge fund managers, Dalio talks up his moneymaking ability and his company’s success in public settings, where he speaks of the company’s “unique success” and likens employees to “intellectual Navy SEALs.” He’s especially fond of posting on LinkedIn. In his TED Talk, he reminds the audience that Bridgewater has made more overall dollars for its clients than any other hedge fund manager (which makes sense, given that he also manages a lot more money than anyone else).
Dalio blends his salesmanship with a hippie side—he’s been a huge supporter of Transcendental Meditation ever since the Beatles’ trip to India—that also includes a dash of Ayn Rand. “Self-interest and society’s interests are generally symbiotic: more than anything else, it is pursuit of self-interest that motivates people to push themselves to do the difficult things that benefit them and that contribute to society,” he wrote in a version of the Principles no longer available on the company’s website. “In return, society rewards those who give it what it wants. That is why how much money people have earned is a rough measure of how much they gave society what it wanted.”
By that measure, Dalio has given society what it wants to the tune of $14.6 billion—his fortune, according to the Bloomberg Billionaires Index. Over time, he’s learned that earning ever more money has diminishing benefits, he’s said, and in 2011 he signed the Giving Pledge, promising to donate more than half his fortune.
Seeking immortality is something that differentiates leaders, entrepreneurs, and artists from everybody else, says Jeffrey Sonnenfeld, a professor at Yale School of Management and author of The Hero’s Farewell: What Happens When CEOs Retire. Building institutions that can outlast them is the responsible course of action, he says.
“It’s good for an entity to outlive a single executive,” says Sonnenfeld, “and Ray is clearly trying on that immortal quest just like many others. While it’s questionable whether expansive personalities and egos can step away, it can happen if they find new missions and trust their successors.”
That’s not always easy. Michael Dell and Howard Schultz returned to their businesses after their companies strained under new management, for instance. Ralph Lauren and Bill Gates retain a hand in their businesses after passing the baton to successors. Rupert Murdoch even remains at the helm of his empire well past the age of 80. Elsewhere in the hedge fund industry, James Simons and David Shaw stand out as two founders who built companies that have succeeded after they bowed out.
As Dalio prepares Bridgewater for life without him, he faces a monumental task. He manages tens of billions of dollars and employs more than a thousand people. And what distinguishes his succession project from others is the breadth and scale of his efforts to ensure that his unorthodox culture remains a mandatory part of life at Bridgewater after he’s gone.
The first step in Dalio’s exit strategy was selling stakes in Bridgewater. He once owned the entire company. He now has less than half and says he plans to reduce his share to between 10 percent and 20 percent. The rest is controlled mostly by about 200 employees. Jensen and Prince, each of whom holds about 5 percent, own more than most. A handful of institutions, including Teacher Retirement System of Texas and Ontario Municipal Employees Retirement System own minority stakes; so do Singapore’s sovereign wealth fund (GIC Private Ltd.) and the International Monetary Fund, according to people with knowledge of the matter. Bridgewater declined to comment.
You can glean important insights into the company through these holdings—namely, owners have done better than investors of late. Texas Teachers, which acquired 2.4 percent of Bridgewater in 2012, has seen a 12.1 percent annualized return on investment through September 2016, according to the pension fund. During that same period, an investment in Bridgewater’s main hedge fund gained about 1 percent annualized. At other hedge funds, investors have begun revolting against high fees paired with underwhelming results, saying that managers are getting rich at their expense and providing little in return. Bridgewater’s assets remain near their peak, while competitors including Jones and Alan Howard have lowered fees and experienced massive withdrawals.
What Bridgewater has done in spades, it seems, is put customer service first. Its client services group employs 200 people—one for every 1.75 clients—and they speak directly to CIOs. Those relationships may have helped keep customers loyal. Rosen of Angeles Investment Advisors credits Bridgewater for forging a collaborative spirit with its investors. Bridgewater will look at a client’s entire portfolio, analyzing how a specific event, whether it’s a huge drop in the stock market or a spike in oil, might play out. The company rarely gives straight-out advice, but rather supplies “frameworks” so clients can make better decisions.
Bridgewater also produces Daily Observations, musings on markets or economics, often with an historical bent, such as a 31-page look at good and bad ways countries have cut their debt or an 81-page treatise on the history of populism in 10 countries. Even though the papers don’t provide actionable investment ideas, most investors say they’re happy to receive such original material in their in-boxes. “When you speak in front of your board, they help make you look smart,” says Brad Alford, who worked at the Duke Endowment in the late 1990s and now runs Alpha Capital Management, a consultant search service in Atlanta.
Bridgewater has also managed its clients’ expectations well, telling investors that performance in its most popular fund can span anywhere from down 18 percent to up 36 percent. Over the main fund’s 26 years, its three losing years—down 3.1 percent, 5.7 percent, and 7.9 percent—are well within that range. Following rival-beating gains of 44.8 percent in 2010 and 25.3 percent in 2011, Bridgewater told clients most investments globally would enter a period of low returns.
Clients interviewed for this story added that the returns aren’t correlated to the stock market or most other hedge funds, echoing key points Bridgewater executives make about their performance. Bridgewater says that, in its annual client survey, 94 percent of respondents gave the “highest ratings” for overall satisfaction over the last five years; 93 percent gave “positive ratings” for performance.
To most investors, Bridgewater’s mantra of radical truth and radical transparency is the reason for its success. “The culture is key,” says James Grossman, CIO of Pennsylvania Public School Employees’ Retirement System. “It drives them to do things better. Their secret sauce is that they are constantly looking for the truth about how markets work and behave.”
The quest for truth, an idea that drives much of Dalio’s Principles, makes life inside Bridgewater especially intense.
“What really distinguishes Bridgewater is truth at all costs,” says co-CEO Murray, 59. “And it is not for everyone.” When Murray arrived eight years ago, she says, she remembered thinking, “I don’t allow anyone to talk to me this way except for my sister”—which is saying something coming from someone who spent decades working for Wall Street alpha males, including former Morgan Stanley CEO John Mack.
In interviews with Bloomberg Markets, Murray and other employees spoke about the feeling of family at Bridgewater—one fostered by all the employees working on the same campus. The headquarters, located in a bedroom community about 60 miles northeast of New York City, is the company’s sole office, despite trading in global markets and serving international investors. This also guarantees that control remains centralized.
Employees live to work there. Campus encounters can be so intense, the pine trees might as well be porcupines. One video of a meeting included in a 2012 Harvard Business School case study shows Dalio and Jensen admonishing a younger colleague in an investment meeting for being defensive. Jensen points out the younger man’s habit of using the words “as we have said” and then adding a point to his argument that logically doesn’t fit, rather than saying “as we missed.” One former employee, who left after less than two years and would speak only on the condition of anonymity, recounted a Maoist-like struggle session where a young male employee was berated by a group of peers and superiors for not being good enough. Instead of helping him improve or getting rid of him, they needed to “get in sync” about the employee’s perceived inadequacies, he says. The encounter ended, he adds, with the man firing himself. (Bridgewater says it isn’t familiar with this episode and that in its most recent quarterly employee survey, 99.4 percent of respondents said communication is open and honest and their manager cares for them in a way that’s meaningful and genuine.)
Twenty-one percent of employees leave within the first year of experiencing the company’s “radical transparency.” An additional 10 percent quit in the second. After that, attrition falls off to the low single digits, according to the company. Adapting to the culture usually takes 18 months and requires a leap of faith. One employee, who asked not to be named, advises new recruits not to question whether they’re enjoying or hating their experience but to keep an open mind. She now finds the constant feedback, which was at first overwhelming, empowering. As a self-described “people pleaser,” she’s learned to be more assertive even outside work. Another employee says the feedback on weaknesses helped her progress more quickly in her career.
Once they make it through the gantlet, many staffers are there to stay. To keep those bonds strong, Murray created “affinity groups,” 100 or so clubs where people play softball or rescue pets together. Prince, who once invented a golf putter, helped establish Grace Community Church in New Canaan, which some Bridgewater employees attend. Younger staffers live together in dorms during the week. Murray has even lodged colleagues in her home.
Culture is a nebulous concept. At companies, it runs the gamut from having informal values and mission statements to explicit guidelines. It can foster workforce cohesion and align staff closer to company goals but can also risk deteriorating if it doesn’t evolve or is too stifling, Yale’s Sonnenfeld says. “Cultures need to adapt or else they become like rigid religions,” he says. “That may lead to employees becoming too risk-averse and second-guessing what their founder would do in any given situation.”
Robert Kegan spent time at Bridgewater and listened to more than 100 hours of meetings for a 2016 book he co-authored, An Everyone Culture: Becoming a Deliberately Developmental Organization. He describes Dalio as a “messenger from the future” because of the self-analysis he champions. “But if you choose to commit to the Principles, you have to realize it’s hard,” he says. “It’s like constitutional democracy. It’s good in theory, but the reality can be different.”
For Bridgewater, finishing the lawmaking project—the company’s charter—is one of the last steps before Dalio can pass on his boon and just manage money in the woods. This rule of law, rather than rule by whoever is in charge, is “closer to the U.S. legal system” than any guidelines or policies a typical company might have, Dalio says. The effort led by senior managers and board members involves building out and expanding in extraordinary detail a governance structure based on the Principles, he says. The charter will outline how people’s votes are weighted and what benchmarks are used to measure investments, among other details. It will even clarify which disputes get escalated to the management committee. The group in charge is also creating a system for how the Principles can be amended, added, or deleted and what happens to employees who don’t follow them. Dalio expects this phase of the charter’s development to take another year to complete.
Codifying the Principles makes sense for a company that’s already codified everything else. Just as Bridgewater automated its money management, it’s been capturing data on its employees to feed its people-management algos. Sure, plenty of companies scour emails, telephone logs, and calendar entries to measure productivity and boost efficiency or buy people-analytics software that uses behavioral science to help streamline decision-making. Real-time assessments aren’t out of the ordinary in an age where social media and technology invite immediate reactions for everything from car services to restaurants. Recently, Goldman Sachs Group Inc. and JPMorgan Chase & Co. have gone as far as introducing software that enables employees to exchange instant scorings of one another. Yet Bridgewater’s use of employee ratings is on steroids, more akin to the Black Mirror episode in which people’s feedback of each other has a dramatic impact on their daily life.
In Westport, workers carry iPads to grade their colleagues on attributes such as Assertive & Open-Minded or Dealing With Ambiguity. They are required to “actively” log these assessments, known as Dots. The Dot Collector then rates employees’ strengths and weaknesses weighted by the rankers’ believability—how much their views can be trusted. The company has collected about 3 million Dots to date, or about 2,000 per employee. Each employee has a Baseball Card, with ratings on 75 or so attributes, and anyone can see anyone else’s card.
Dalio says anyone can and should be able to weigh in on an idea or criticize anyone, including him. In his TED Talk, for example, he shows an email from an underling giving him a D-minus for his preparedness—and makes clear that he relishes the employee’s openness. Not everyone’s opinion is equal, however, and the company runs on what Dalio calls believability-weighted decision-making. Dalio’s Baseball Card shows him to be among the most believable in the company, so his opinion carries more weight than most. His rating, though, isn’t so high that other believable employees can’t overrule it, according to the company. Former employees who left within a few years put it more bluntly: Everyone has to bend to Ray’s way.
One investor, who declined to be identified, says that while culture has been a key to success, it’s hard to tell if it’s gone too far—or if there remains a broad buy-in across Bridgewater. He’s also critical that the company didn’t do a great job of communicating the news that Dalio was temporarily stepping back into the co-CEO role that Jensen previously held, with most of the information coming from the press rather than directly from the company.
Much of the technology powering these Bridgewater initiatives comes from David Ferrucci, 55, who joined in 2012 after leading the International Business Machines Corp. group that developed Watson, the human-trouncing computer Jeopardy! helped make famous. His AI efforts have guided Bridgewater’s internal apps. The software includes the Dot Collector; the Combinator, which helps choose the right people for jobs based on their Dots; the Dispute Resolver, which assists two parties in resolving issues according to the Principles; the Coach, which guides people in making decisions based on the Principles; and finally the Pain Button, which helps each person understand why they’re feeling embarrassment or confusion. “It’s like a psychologist,” Dalio says. Ferrucci’s current AI challenge is to build systems that can grasp the meaning of language and provide explanations of how they came up with answers, according to the website for Elemental Cognition, the company he founded in January 2015 in partnership with Bridgewater.
Dalio has high hopes for AI. “I imagine when the day is done that the algorithm will have all information that’s going on everywhere. It will have all the criteria, it will be a lot smarter and knowledgeable than any person and give much more superior guidance to anybody,” he says.
One person no longer offering guidance at Bridgewater is Rubinstein. He may have helped Steve Jobs create the iPod at Apple, yet he crashed and burned after less than a year under Dalio—and it wasn’t as if he didn’t know what he was walking into. Even before joining, Rubinstein, 61, attended and watched hours of meetings and shadowed senior executives. Within four months, however, it was already clear he was struggling to adapt, according to people at the company. Rubinstein declined to comment.
McCormick, 51, a West Point graduate who worked in the Treasury Department under President George W. Bush, says Bridgewater is making more of an effort to show job candidates “the hard conversations and tapes that expose what it really is.” Sharing this tougher side of the culture helps prepare prospects for the reality of what’s ahead. “It’s like watching the Navy SEAL TV ads—the uniforms, the fast roping from the helicopter into the water. It’s very appealing,” says the co-CEO. “But when it’s 3 a.m. and you’re treading water in the middle of the freezing ocean, well, that’s SEAL School.”
Another way the company assists senior hires is providing “ski partners” who help them co-lead their teams and coach them on the culture. To train the next generation of leaders, the company is developing “succession pyramids.” It’s also attempting to cultivate a Bridgewater alumni network that might help spread the word about the advantages of working there.
At least one observer says Dalio has the key personnel in place now, especially with McCormick, who has the client-facing role Dalio once held. “David is maybe the right person to continue that culture without destroying the legacy,” says Yale’s Sonnenfeld, who knows both men. “Dalio has such a trusted relationship with him.” Indeed, in one archived video seen by a former employee, Dalio says McCormick is one of his heroes.
“The last act in the biography of the hero is that of the death or departure,” Campbell wrote in The Hero With a Thousand Faces. For his part, Bridgewater’s founder is looking toward the end of his journey. “Life exists in three phases for me,” Dalio says. “There’s the first phase in which you’re learning and dependent on others; there’s the second phase in which you’re working, and others are dependent on you; and then there’s this third phase where no one is dependent on you, and you’re free.”
While Dalio embraces freedom as his destiny, few have more at stake than Bridgewater. After all, $162 billion isn’t nothing.
Burton and Kishan cover hedge funds for Bloomberg News in New York.