How Does the World’s Largest Hedge Fund Really Make Its Money?

For years, the whispered questions have passed from one Wall Street trading floor to the next.

Bridgewater Associates, a global investing force, had $168 billion under management at its peak in 2022, making it not just the world’s largest hedge fund, but also more than twice the size of the runner-up. Bridgewater’s billionaire founder, Ray Dalio, was omnipresent in the financial media and said publicly that he had cracked what he termed “the holy grail” of investing, including a series of trading formulas bound to make money, “by which I mean that if you find this thing, you will be rich and successful.”

So why didn’t anyone on Wall Street know much of anything about it?

Since founding Bridgewater in his Manhattan apartment in 1975, Mr. Dalio has been said to have developed prodigious skill at spotting, and making money from, big-picture global economic or political changes, such as when a country raises its interest rates or cuts taxes. That made both a lot of sense and none at all; what was it about Bridgewater that made it so much better at predictions than any other investor in the world trying to do the exact same thing?

Bridgewater earned worldwide fame for navigating the 2008 financial crisis, when the firm’s main fund rose 9 percent while stocks dropped 37 percent, making Mr. Dalio a sought-after adviser for the White House and Federal Reserve and attracting new deep-pocketed clients to his fund. Yet the hedge fund’s overall descriptions of its investment approach could be maddeningly vague. Mr. Dalio often said he relied on Bridgewater’s “investment engine,” a collection of hundreds of “signals,” or quantitative indicators that a market was due to rise or fall. Bridgewater rarely revealed any details of these signals, citing competitive pressure, but if they pointed to trouble ahead or even to uncertainty, Bridgewater said it would buy or sell assets accordingly — even if Mr. Dalio’s own gut might have told him otherwise.

This supposed conquering of his base instincts was central to Mr. Dalio’s identity and expressed in his manifesto, “Principles,” which prescribed a doctrine of “radical transparency” and listed hundreds of rules for how to overcome one’s psyche. (One rule reads, in part: “Not all opinions are equally valuable so don’t treat them as such.”)

What confused rivals, investors and onlookers alike was that the world’s biggest hedge fund didn’t seem to be much of a Wall Street player at all. Much smaller hedge funds could move the markets just by rumors of one trade or another. Bridgewater’s heft should have made it the ultimate whale, sending waves rolling every time it adjusted a position. Instead, the firm’s footprint was more like that of a minnow.

What if the secret was that there was no secret?

The book from which this excerpt is drawn is based on hundreds of interviews with people in and around Bridgewater Associates, including current and former investment employees. It also relies on contemporaneous notes, emails, recordings, court records, myriad other internal and external company documents, and published interviews and articles. Mr. Dalio and other Bridgewater executives declined requests for official interviews but provided feedback through their lawyers and representatives.
 

The Freelance Investigators

 

Three men, each with a vastly different background, took three different passes at the mystery of how Bridgewater picked its positions.

In early 2015, Bill Ackman, the endlessly opinionated hedge fund manager, took the first whack. The billionaire founder of Pershing Square Capital had long found Mr. Dalio’s public pronouncements about his quantitative investment style to be generic and even nonsensical. At a charity event in February that year, Mr. Ackman grilled Mr. Dalio during an onstage interview about how Bridgewater handled the assets it managed.

Mr. Dalio responded: “Well, first of all, I think it’s because I could be long and short anything in the world. I’m basically long in liquid stuff. And I can be short or long anything in the world, and I’m short or long practically everything.”

He also noted that some 99 percent of Bridgewater trading was automated, based on longtime, unspecified rules. “They’re my criteria, so I’m very comfortable,” Mr. Dalio said.

Mr. Ackman tried another tack. He gave Mr. Dalio a layup, the sort of question asked six times an hour on business television. “Let’s say you were to buy one asset, or one stock, or one market, or one currency. Where would you put your money?”

There was a pause, then Mr. Dalio said, “I don’t do that.” He went on to lay out how Bridgewater’s hundreds of investment staff members spent their days, describing a data-driven approach.

Onstage, Mr. Ackman would remark that it was “one of the most interesting conversations I’ve ever had.” But he walked away shaking his head.

“What was he even talking about?” he vented afterward.

The financial analyst Jim Grant, the self-styled “prophet of reason,” watched the interview with amazement. He had an arcane newsletter, Grant’s Interest Rate Observer, which was popular in the sense that many serious investors claimed to read it.

Mr. Grant for years had privately mulled dark questions about Bridgewater. He assigned his top deputy to dig in. They fanned out widely, scrutinizing the firm’s public filings, and furtively talking to anyone who might have a clue as to what was going on. They were inundated with “all sorts of people winking and nodding,” Mr. Grant recalled, “that there’s something really, really wrong.” In October 2017, Mr. Grant devoted a full issue of his publication solely to Bridgewater, and the themes of “distraction, sycophancy” and “mystery.”

The newsletter claimed a litany of issues. Shareholders in Bridgewater’s parent company — a group that includes employees and clients — didn’t automatically receive copies of the firm’s financial statements. Five separate Dalio family trusts appeared to each hold “at least 25 percent but less than 50 percent of Bridgewater, something that seems mathematically difficult,” the newsletter said. Per public disclosures, the hedge fund lent money to its own auditor, which struck the longtime analyst as precarious and unusual. “We will go out on a limb, Bridgewater is not for the ages,” the newsletter concluded.

At 8:30 p.m. the day the report was published, Mr. Grant settled in on the couch at home with his wife to watch a New York Yankees game. When his home phone rang from an unknown Connecticut number, Mr. Grant let the call go to voice mail. Not until about a half-hour later did his wife hear a distant beep. She walked over and hit play on the machine, putting the message on speakerphone. Mr. Dalio’s voice, measured and calm, rang out:

“I’m not sure if you’ve seen the current issue of Grant’s,” Mr. Dalio said, according to Mr. Grant. Mr. Dalio’s message went on for nearly a half-hour detailing his complaints about the piece.

 

 

Mr. Grant spent the next week on and off calls with various Bridgewater executives. He realized that he had gotten some crucial bits wrong regarding the fund’s regulatory filings and auditing relationship. Mr. Grant called into the television network CNBC to apologize, though overall, Mr. Grant said, he remained befuddled “about how it actually does business.”

This all piqued the interest of a Boston financial investigator, Harry Markopolos, who had been a no-name analyst in the late 1990s when his boss asked him to reproduce a rival’s trading strategy that seemed to pay off handsomely. Mr. Markopolos couldn’t, but he figured out enough that he began chatting with the Securities and Exchange Commission. Six years later, when his warnings about Bernie Madoff proved right, Mr. Markopolos earned national fame.

To Mr. Markopolos, what was happening in Westport, Conn., where Bridgewater has its headquarters, raised serious questions, according to people who worked with him. Here lay another giant hedge fund famed for an investment approach that no competitors seemed to understand. He got his hands on Bridgewater’s marketing documents, including a summary of the firm’s investment strategy and a detailed chart of fund performance. Bridgewater described itself as a global asset manager, yet these documents didn’t name a single specific asset that had made or lost the firm money. An investment-performance chart indicated the firm seldom had a down year — even when Mr. Dalio’s public predictions proved off, Bridgewater’s main fund, Pure Alpha, consistently seemed to end the year around flat.

As he looked over the documents, Mr. Markopolos felt a familiar flutter in his heart.

His team spoke with Kyle Bass, a Texas hedge fund manager well known for his ahead-of-the-curve predictions that the subprime-mortgage market was about to collapse in 2008, according to three members of Mr. Markopolos’s group. Mr. Bass told colleagues that he, too, had long wondered about how Bridgewater traded.

Mr. Markopolos also went to see David Einhorn of Greenlight Capital, the hedge fund billionaire famed for spotting frauds. Mr. Einhorn welcomed Mr. Markopolos into his Manhattan office, and they sat down with a team of Greenlight analysts who Mr. Einhorn said were interested in investigating Bridgewater themselves, two people present recalled.

After hearing Mr. Markopolos’s talk, Mr. Einhorn said it tracked with his suspicions, too.

That was all the encouragement Mr. Markopolos needed.

Bridgewater, he wrote to the S.E.C., was a Ponzi scheme.
 

Circle of Trust

Bridgewater was not a Ponzi scheme.

Which is not to say that all was as Mr. Dalio so often described it.

The S.E.C. and other regulators dutifully took meetings with Mr. Markopolos and his team. The whistle-blowers’ report was passed through the organization, and a team at the agency looked into it. (The S.E.C. declined to comment.)

According to a person briefed on the investigation, what they concluded, in part, was that the world’s biggest hedge fund used a complicated sequence of financial machinations — including relatively hard-to-track trading instruments — to make otherwise straightforward-seeming investments. It made sense to the S.E.C. that rivals couldn’t track them.

Satisfied, the S.E.C. stopped responding to requests from Mr. Markopolos and his crew for updates. Regulators raised no public accusations about Bridgewater. Mr. Markopolos moved on.

As it turned out, by the time the S.E.C. received Mr. Markopolos’s submission, the regulators had already looked into Bridgewater. In the wake of the Madoff fraud, and never having really dug into the world’s biggest hedge fund, S.E.C. staff spent a stretch in Westport, deeply studying the firm’s operations. The S.E.C. did not much bother with how Bridgewater made money, just that it did indeed invest its clients’ accounts.

 

In fact, remarkably few people at Bridgewater were involved day to day with how the hedge fund made money.

Of Bridgewater’s roughly 2,000 employees at its peak — and hundreds more temporary contractors — fewer than 20 percent were assigned to investments or related research. (The rest worked on operations tasks, including the expansion of Mr. Dalio’s “Principles.”) And of those investment staff members, many held responsibilities no more complicated than those of the average college student. They worked on economic history research projects and produced papers that Mr. Dalio would review and edit.

As for whether those insights made it into Bridgewater’s trading, most research employees knew not to ask, current and former investment employees said.

Only a tiny group at Bridgewater, no more than about 10 people, enjoyed a different view. Mr. Dalio and his longtime deputy, Greg Jensen, plucked the members from the crew of Bridgewater investment associates and offered them entry to the inner sanctum. In exchange for signing a lifetime contract — and swearing never to work at another trading firm — they would see Bridgewater’s inner secrets.

Mr. Dalio called the group of signees the Circle of Trust.
 

A True Spectacle

There were two versions of how Bridgewater invested hundreds of billions of dollars in the markets. One version, Mr. Dalio told the public and clients about. The other version, current and former investment employees said, happened behind closed doors.

In the first version, Bridgewater’s hedge funds were a meritocracy of ideas. Every investment staff member or researcher could suggest an investment notion, and the Bridgewater team would debate the merits of the thesis dispassionately, incorporating a broad study of history. Ideas from investment employees with a record of accurate predictions would over time carry more weight and earn backing with more client money. Investors flocked to the approach, assured that Bridgewater — unlike other hedge funds — would not rise or fall off a single trade or prediction from the firm founder. It was the Wall Street equivalent of Darwinism, with a thick wallet.

Every Friday Mr. Dalio’s assistants would deliver thick briefcases full of economic research, which a driver would whisk to Mr. Dalio’s mansion in Greenwich, Conn. The collection formed the basis for what Bridgewater called its “What’s Going On in the World” meeting, held every Monday morning. Mr. Dalio, along with Mr. Jensen and Bridgewater’s longtime co-chief investment officer Bob Prince, would sit at the front of the largest room on campus, where a river wound around a set of medieval-style buildings. Rows upon rows of staff members sat in front of them, as well as the odd visiting client invited to take in the show.

 

With cameras recording so those in the rest of the firm could watch later, the room would debate for hours the grand topics of the day. It was a true spectacle.

It was also almost entirely irrelevant to what Bridgewater did with its money.

After the meeting, the Circle of Trust would file into a tight corner of offices that few others at the firm had access to, and the real work would begin.
 

Trading Game

The bottom line: Mr. Dalio was Bridgewater and Mr. Dalio decided Bridgewater’s investments. True, there was the so-called Circle of Trust. But though more than one person may have weighed in, functionally only one investment opinion mattered at the firm’s flagship fund, employees said. There was no grand system, no artificial intelligence of any substance, no holy grail. There was just Mr. Dalio, in person, over the phone, from his yacht, or for a few weeks many summers from his villa in Spain, calling the shots.

Lawyers for Mr. Dalio and Bridgewater said the hedge fund “is not a place where one man rules because the system makes the decision 98 percent of the time.” They said that “the notion that Mr. Dalio ‘call[ed] the shots’ on Bridgewater’s investments is false.”

Mr. Dalio largely oversaw Pure Alpha, the main fund, with a series of if-then rules. If one thing happened, then another would follow. For Pure Alpha, one such if-then rule was that if interest rates declined in a country, then the currency of that country would depreciate, so Pure Alpha would bet against the currencies of countries with falling interest rates

Many of the rules dealt simply with trends. They suggested that short-term moves were likely to be indicative of long-term ones and dictated following the momentum in various markets.

Bridgewater’s rules gave it an unquestionable edge in the wildly successful early days, in the late 1980s and 1990s, when most people on Wall Street, from junior traders to billionaires, still believed in the value of their intuition.

As the years passed, however, Mr. Dalio’s advantage softened, then seemingly ceased by the 2010s and into this decade. The rise of powerful computers made it easy for any trader to program rules and to trade by them. Rivals quickly matched Mr. Dalio’s discoveries, then blew past them into areas such as high-frequency trading. Mr. Dalio stuck to his historic rules. (“They are timeless and universal,” he told one interviewer.)

Though Bridgewater’s assets under management slowly contracted to under $130 billion in the postpandemic period, Bridgewater was so much larger than any other rival — and so willing to collect money from virtually any corner of the earth — that it was still the globe’s largest hedge fund. And if Bridgewater’s main hedge fund had for years fallen behind the pace of global markets, it still mostly avoided negative results, and so could fairly say it was making clients money on an absolute basis. Its growth was a testament to the firm’s marketing prowess, which had cultivated a mystique around Pure Alpha’s hands-off, rules-based approach.

Plenty of smart, ambitious employees at Bridgewater, including members of the Circle of Trust, tried to move the hedge fund forward. But the only way to add a new rule to the hedge fund’s list was to win the unanimous approval of Messrs. Dalio, Prince and Jensen, and it was not a secret vote. Neither Mr. Prince nor Mr. Jensen went against the Bridgewater founder often, and Mr. Dalio seemed to shy from new ideas that he couldn’t understand. A newcomer to the investment team as recently as 2018 was gobsmacked to learn that the world’s biggest hedge fund’s trading was still reliant on Microsoft Excel, a decades-old software.

The stasis was such that Bridgewater would create “the trading game,” a simulation of the real world in which members of the investment staff would bet their best ideas against a pot of Mr. Dalio’s own money. (If the ideas of staff members won, they would be paid in cash.)

For many in the investing department, it was the only time in their Bridgewater careers that they could actually enact an investment idea.
 

‘Get ’Em a Helicopter’

Mr. Dalio could read the numbers as well as anyone else. From 2011 to 2016, a blistering period for the markets, Pure Alpha posted only low-digit returns, investors said, far below its historical pace, and the next five years weren’t much better.

One edge was left that Mr. Dalio and Bridgewater went to great lengths to protect.

On Wall Street, the phrase “information advantage” often carries an unseemly implication, suggesting that one is engaged in insider trading. Mr. Dalio’s information advantage, however, was as legal as it was vast.

Bridgewater’s target was information about entire nations. According to employees involved with the effort, Mr. Dalio heavily courted well-connected government officials from whom he might divine how they planned to intervene in their economies — and Bridgewater used these insights to make money in its funds.

Anywhere seemed fair game, even Kazakhstan.

 

The Central Asian nation was not on the first page in any Wall Street manual. Ruled by an authoritarian government, it is the globe’s largest landlocked country yet sparsely populated. In 2013, Kazakhstan began developing what was then the most expensive oil project — a giant field in the Caspian Sea — helping it grow a $77 billion sovereign wealth fund. That money would have to be invested somewhere, and Bridgewater’s client services squad put a meeting on Mr. Dalio’s calendar with Berik Otemurat, the fund’s chief, a bureaucrat who had begun his career barely 10 years earlier.

Mr. Dalio showed interest in the delegation. “What are they doing beforehand?” he asked Bridgewater’s marketing team.

His underlings answered that Mr. Otemurat would be in New York a few hours before he was due in Westport.

“How are they getting here?” Mr. Dalio then asked.

Bridgewater had arranged for a chauffeur in a Mercedes.
 

“Get ’em a helicopter.”

The dramatic entrance preceded an unconventional presentation, at least compared with what Mr. Otemurat had experienced in New York. There, titans of industry, such as KKR’s co-founder Henry Kravis and Blackstone’s Stephen Schwarzman, wooed him over sea bass, caviar and an orange hazelnut Napoleon dessert loosely based on the Kazakh flag.

Mr. Dalio drew an indecipherable chart on a dry-erase board and rambled on about the nature of markets. He barely mentioned the specifics of Bridgewater’s approach, according to a person present. There was an undeniable charm — and confidence — to it all.

Bridgewater’s marketing team had seen this move before. The end goal would be something other than money. So when Mr. Otemurat raised the prospect of investing $15 million in Bridgewater’s main hedge fund, the fund’s representatives shooed away the suggestion. “We don’t want a relationship with you right now,” one marketing executive said. “We’re in it for the long game.”

Inside Bridgewater, a relationship meant access. The country’s new oil field had taken more than a decade to develop, with near-constant delays. Anyone who knew how the project was proceeding could adjust bets on oil accordingly. Bridgewater’s representatives told the delegation that their firm would be happy to offer free investing advice, and Bridgewater’s team would likewise appreciate the opportunity to ask questions about industries of local expertise.

Mr. Otemurat and others in his delegation seemed eager to chat.

Soon enough, Bridgewater got it both ways. A few months after Mr. Otemurat’s Westport visit, the Kazakh fund asked again if it could invest in Bridgewater’s funds. This time, it dangled a sum far larger than $15 million, and Bridgewater assented, former employees said.

A spokesman for Mr. Dalio said all of his interactions with government officials were proper.
 

No One Would Know

 

Back in America, Mr. Dalio’s influence slowly petered out. During and after his financial-crisis era fame, he’d had little trouble reaching the Federal Reserve chair, Ben Bernanke. Mr. Bernanke’s successor, Janet Yellen, however, apparently wasn’t as interested in the Bridgewater founder. Mr. Dalio would regularly rail to others at the company that Ms. Yellen wouldn’t return his calls or meet.

Mr. Dalio consistently found more success abroad. Mario Draghi, the Italian-born head of the European Central Bank from 2011 to 2019, frequently chatted with the Bridgewater founder and sought his advice. Mr. Dalio advised him throughout the mid-2010s to introduce more stimulus to the European Union, which would bolster European stocks and hurt the euro. During much of that era, Bridgewater was also betting against the euro. In Zurich, Mr. Dalio found the ear of the Swiss National Bank. He advised the bank on its efforts to decouple the Swiss economy from ailing broader Europe, according to a former Bridgewater employee who helped make the connection. When the Swiss National Bank in early 2015 yanked the Swiss franc from its peg to the euro, Bridgewater’s funds made a fortune.

The longest-term project for Mr. Dalio was in China, where he made frequent trips.

Mr. Dalio hired China Investment Corporation’s former chairman to a cushy job as head of a Dalio charity in China, and he became close with Wang Qishan, who would later become China’s vice premier and widely considered the second most powerful person in the country. Mr. Dalio would occasionally tell Chinese government representatives that when they invested with Bridgewater, their fees were not merely being sent back to America. “Whatever fees you pay, I will donate back to China personally,” he said in one meeting, according to a person present.

 

 

In media interviews, Mr. Dalio stuck to a fixed, laudatory line about the country’s leadership. It was “very capable,” he said, over and again, sometimes repeating the phrase more than once in an interview. Those same leaders, he would also say inside Bridgewater, were quick to ask him for advice.

To any reasonable observer — and even to the Chinese themselves — Mr. Dalio was the paradigm of a China booster. But there was also an advantage that could be played. He asked the Circle of Trust to help create a way for Bridgewater’s funds to place bets against Chinese assets, in an offshore way that China’s government couldn’t track. That way, when Bridgewater took the wrong side of China, no one would know.
 

A Coin Flip

Mr. Dalio’s grand automated system — his investment engine — wasn’t nearly as automated or mechanized as was promoted. If he wanted Bridgewater to short the U.S. dollar (as he did, unsuccessfully, for roughly a decade after the 2008 financial crisis), the trade went in. There was not a rule more important than what Mr. Dalio wanted, Mr. Dalio got.

As 2017 loomed, a handful of top investment staff members decided enough was enough. Pure Alpha was up just 2 percent for the year, well below most hedge funds.

With the hope of turning around the firm’s investment performance, members of the Circle of Trust put together a study of Mr. Dalio’s trades. They trawled deep into the Bridgewater archives for a history of Mr. Dalio’s individual investment ideas. The team ran the numbers once, then again, and again. The data had to be perfect. Then they sat down with Mr. Dalio, according to current and former employees who were present. (Lawyers for Mr. Dalio and Bridgewater said that no study was commissioned of Mr. Dalio’s trades and that no meeting took place to discuss them.)

One young employee, hands shaking, handed over the results: The study showed that Mr. Dalio had been wrong as much as he had been right.

Trading on his ideas lately was often akin to a coin flip.

The group sat quietly, nervously waiting for the Bridgewater founder’s response.

Mr. Dalio picked up the piece of paper, crumpled it into a ball and tossed it.

 

Rob Copeland is a finance reporter, writing about Wall Street and the banking industry. He is the author of "The Fund: Ray Dalio, Bridgewater Associates and the Unraveling of a Wall Street Legend," to be published in November 2023. More about Rob Copeland