Ray Dalio: Bridgewater Associates

For the past 18 years Bridgewater Associates’ flagship hedge fund, Pure Alpha, which now contains more than $38 billion, has averaged an annual return of 15% before fees – cruising through the Asian flu of the 1990s, the dotcom implosion, the terrorist attacks of Sept. 11, 2001, and today’s worldwide financial crisis without ever posting an annual loss greater than 2%. Last year, when 70% of all hedge funds lost money and the average fund fell by 18%, Pure Alpha produced a gross return of 14%.

These are not normal times. Yet, what makes Ray Dalio compelling is not just his amazing track record but the way he goes about making money, and the rigorous analysis he uses to understanding markets, organizations, the economy, and life in general.

Dalio says, I am afraid of messing up and that fear drives me to ask, ‘Well, could this thing happen? Or could that thing happen? If it happened in South America, how do I know it won’t happen to me?'”

Ray Dalio describes himself as a “hyperrealist,” meaning that he is driven to understand the processes that govern the ways the world really works, without making subjective value judgments and effecting the equation. ‘I think that what makes him different is intolerance for the inadequate answer,’ says Bob Prince, 50, Bridgewater’s co-chief investment officer since 1986. ‘He just keeps peeling away layer after layer to get at the essential truth.’

In every activity in his life Dalio believes in using a carefully thought-out process to obtain the results he wants. ‘I’m very big on using clarified principles,’ he says. ‘I don’t believe that it’s good to be reactive. You can’t effective in the markets. I can’t. I need enough perspective. I need to have a game plan.’ To develop one, he stress-tests strategies using computer simulation across time and around the world to ensure that they’re “timeless and universal.” It’s all about cautious – and very educated – betting on probabilities.

Ray Dalio translates his insights into algorithms and then has a powerful computer system scan tens of markets throughout the world looking for mispriced assets and other opportunities. Instead of focusing only on stocks and searching for Peter Lynch’s “10-bagger,” Dalio and his computers concentrate heavily on the currency and fixed-income markets, hitting consistent singles, doubles, and occasional triples. We’ve witnessed that this approach can be very rewarding.

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