Unclothing the Emperor: Ray Dalio
The article can be considered a follow up to my post on ‘why Funds are like Burger Chains and Investors like dieters’
Without a doubt the super star of true hedge funds is currently no other than Ray Dalio. His hedge fund management company runs in total the highest Assets Under management of any hedge fund, anywhere in the world. This of course has not only made his clients money, but Ray Dalio himself a billionaire in the process. The common man knowns Ray Dalio as a semi systemic macro fund manager which emphasis minimizing down side risk for which they have plotted literally hundreds of years of data across the global financial markets.
His understanding of the markets, it is often said, goes beyond that of the Fed. To the untrained eye, it might seem that Bridgewater Associates, with its swarm of PhDs and Ivy League types holds the key to unlimited wealth somewhere down its in Connecticut offices , however on closer look his strategy doesn’t seem all that original and it turns out that the firm’s size is more a reflection of Mr Dalio’s business acumen rather than his talent as an investor. The discussion is primarily about his ‘All Weather Fund’
First of all, lets us look at downsize risk, minimizing which has been Mr Dalio’s edge over his competitors. Risk can be defined in several ways, and it is apparent that Mr Dalio looks at risk as volatility of returns. He aims to balance risk and reward, but with an emphasis to ensure that the least amount of money is lost. Although his massively successful All Weather Fund does achieve this in a remarkable manner, other hedge funds have simply tended to take more risks. If one looks at other Super star fund managers such as Bill Ackman or David Tepper, they have actually provided better long term returns, although with more volatility. He does this very well with his notorious All Weather fund Now is this better or worse actually depends on the style of the fund manager as well as the requirement of the investors. Which brings me to my next point.
Bill Ackman and David Tepper run huge funds, but compared to Bridgewater Associates they are frankly puny. Wealth individuals were the original investors in hedge funds who were willing to take on much higher risk however their pockets are small…..compared to pension funds. With emphasis on downside risk and lower volatility Mr Dalio was able to attract pension/endowment fund money into his own hedge fund (as well as hedge fund industry overall). Many credit this to be his main achievement for the hedge fund industry. Pension funds typically invested primarily in bonds due to their safety, however ray Dalio since the beginning was able to attract massive pools of money from them and as All weather Fund primarily as the modern portfolio theory as its foundation, massive sums of money can be used to invest in whole asset classes, hedged, leveraged (possible also driven by macro themes).
Now that we have established that Mr Dalio is an exceptional marketers of hedge funds, I must also dissect his claim to fame of separating Alpha returns from Beta returns. Once again I do not believe this was his innovation entirely. Hedge fund Managers such as Julian Robertson and Stanley Druckenmiller have continuously kept a core hedge portfolio, and invested around that. Now, it does not guarantee Beta returns, but i believe the idea to have a core systemic sort of a portfolio around which investments are made, is something fund managers had already done. In true Ray Dalio’s Pension Fund Style Investing, the systemic part became ‘returns of the market’ around which Alpha is achieved.
Originally published at www.linkedin.com on May 3, 2015.