Ray Dalio is having a very bad year.
So very bad, in fact, that the billionaire risks losing his coveted title as king of hedge funds.
Dalio’s $148 billion Bridgewater Associates has run up hefty losses this year, even as rivals have minted money in the topsy-turvy markets. The damage as of August: an 18.6% drop in the flagship Pure Alpha II fund.
Those losses, the worst in a decade, top a sprawling list of troubles that has plunged Bridgewater into a round of crisis management, according to more than 25 people with knowledge of the firm’s inner workings.
First, Bridgewater’s computer models initially misread the markets for a second year in a row. Then, big clients began to head for the exits. Investors pulled a net $3.5 billion during the first seven months of the year. Industry consultants expect more to follow.
If all that weren’t enough, Dalio lost an arbitration fight with ex-staffers, is feuding with his former co-chief executive and has axed dozens of employees.
It’s a remarkable turnabout for Dalio, 71, who has long prided himself on being a big thinker on the world economy, management and more. Bridgewater insiders are concerned that the firm lost its way as Dalio cultivated his iconoclast image, hit the Davos circuit and published his 2017 best-seller, “Principles,” his rules for life and business.
At virtual town hall meetings and in client letters, Dalio and his co-chief investment officers have tried to put an optimistic face on the situation. Human beings tend to learn more from mistakes than successes, they say, and this year, we are learning a ton.
Lagging Returns
Despite the turmoil, the firm is confident about its position, and its ability to perform for clients.
“Investors believe this environment, where the world is changing rapidly, is a strong environment for a firm like ours that is so committed to understanding how the world works,” Westport, Connecticut-based Bridgewater said in a statement.
The firm has 45 commitments from investors, including many in the $1 billion range, it said without specifying whether the money is heading into the high-fee Pure Alpha hedge funds or low fee long-only products.
But there’s no getting away from lagging returns during a year when assets from global stocks to gold have risen amid the turmoil. Rivals including Caxton Associates and Brevan Howard Asset Management have posted double-digit gains.
This year’s inability to turn big ideas into big returns may be the last straw for some investors after nearly a decade of low-single-digit gains coupled with high fees.
The problem, according to those with inside knowledge who asked not to be identified without permission to speak publicly about the firm, is that Bridgewater cut risk in March as the market crashed and was slow to ramp up again—even as the Federal Reserve unleashed an unprecedented support effort. So even though it correctly touted trades such as going long equities, buying gold and betting on the yen against the dollar, it failed to benefit from its own foresight.
It’s a mistake that recalls the firm’s approach in January last year, when Fed Chairman Jay Powell signaled he’d do whatever it took to keep the economy growing. Having made 14.6% in 2018 mostly thanks to forecasting December’s market meltdown, Bridgewater failed to switch its portfolio to a more bullish position and lost just over 5% in the first two months of 2019. In response, it tweaked its models to better respond to the paradigm shift.
Fixing Models
While rivals such as Renaissance Technologies use math-heavy quantitative methods, Dalio has built his firm and fortune on models that treat economics as a discipline akin to the timeless laws of physics.
Former employees said that Dalio’s broader profile has distracted him from the firm. He has also resisted changing the computer models, they said, including adding new types of data that’s standard at other firms such as tracking oil tankers and credit card activity.
One person close to the firm disputed that characterization and said that over the past five years Bridgewater has made significant improvements to its processes.
This year, after central banks around the globe flooded markets with liquidity in response to the Covid-19 pandemic, Bridgewater investment staff worked again to change the models, this time to account for the unprecedented intervention and the near-complete shutdown of the world’s major economies. They spent more than a month turning off strategies they didn’t think would work in the new environment, and tweaking ones they believed were applicable.
Dalio himself spent as much as 70 hours a week working on the issues, said the person close to the firm, and the risk levels have been at historic norms since about August.
Staff Jitters
Compounding the performance issues, however, are personnel disputes. Former co-CEO Eileen Murray sued Bridgewater in July over her deferred compensation, and alleged gender discrimination in an ongoing battle over her departure package. Investors and consultants said the dispute troubled them, especially given Murray’s status at the firm and in the financial industry overall.
Karen Karniol-Tambour, head of research, has also been at loggerheads with Bridgewater over unequal pay, the Wall Street Journal reported. After the story was published she said in a note to staff and investors her issue had nothing to do with gender.
Amid the difficulties, Bridgewater has cut dozens of employees, saying that fewer are needed because of the pandemic and because it expects to have a smaller number of clients (though not necessarily fewer assets) in the future. The firm has said it now has about 300 investors, down from around 350.
The clients that have stayed cite an annualized 10.4% gain since 1991, and unparalleled customer service. Roughly 200 employees, about half the investment staff, work with clients, and the firm publishes a newsletter with market analysis. It also produces bespoke reports for clients on their entire portfolio — everything from risk analysis to the impact of inflation.
But Bridgewater employees have been unsettled by the poor returns and the layoffs, according to people who have spoken to current staffers.
An arbitration case against two young money managers, Lawrence Minicone and Zachary Squire, who left Bridgewater and planned to start their own firm, Tekmerion Capital Management, also caused concern among staff. An arbitration panel found in July that Bridgewater had brought a theft of trade secrets case against the pair under false pretenses to slow down their progress.
Bridgewater, which fought the panel’s decision that it must pay the Tekmerion founders’ legal fees, has since settled the case.
Extreme Approach
The litigation highlights what some said is the firm’s extreme approach to departing staff. Among the measures: two years unpaid gardening leave for anyone who exits — including those who were fired — during which an employee must ask permission before taking a new job. There are also trade secret agreements for senior investment officials.
The contracts can be so strict that if enforced they could prevent an employee from, for example, trading equities or foreign exchange for the rest of their careers. About a fourth of the 200 people who work directly in investing at Bridgewater would find it very hard or impossible to take another job in finance, according to estimates from former employees, though a person close to the firm said that number was too high.
Bridgewater said in response to questions that its goals are to protect its intellectual property and to support employees in their careers after they leave.
“We won’t sacrifice the first goal for the second, but we work very hard to meet both goals,” it said in a statement. “We believe we are fair and reasonable partners and have no incentive to enforce the restrictions more broadly than necessary.”
Still, the buzz around the Tekmerion case caused the firm to hold an open forum where staff could discuss the issue.
This year’s changes to the models could eventually pay off—Bridgewater has famously thrived after downturns despite struggling at first. While it lost 20% during 2008’s financial crisis, it gained 45% and 25% in 2010 and 2011, respectively. And after losing 22% in the dot-com crash of 2000, it posted three straight years of returns over 20% from 2002.
A similar bounce back this time could come too late for some investors who may have already lost faith in Dalio. Since stepping back from CEO duties, his public persona has been shaped by his book, celebrity friends including Sean Combs and even attendance at last year’s Burning Man festival.
“I’ve been in the business for 30-plus years and seen a lot of hedge fund founders become billionaires and focus on other things besides their firms,” said Brad Alford, who ran hedge fund investments at Emory University and the Duke Endowment. “And I’ve seen firms where assets have exploded, and that growth brings really bad performance.”
