The secret of the world's largest hedge fund, Bridgewater: primarily trading based on Dalio's intuition
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The secret of the world's largest hedge fund, Bridgewater: primarily trading based on Dalio's intuition
Studies show that Dalio is right about as often as he is wrong, and trading based on his ideas is often akin to flipping a coin.
Navigating Web3 tides with focused insightsBy Rob Copeland
The author is a financial reporter for The New York Times. He is the author of "Money Kings: The Secret History of the Men Who Made Wall Street," from which this article is adapted.
Ray Dalio’s investment strategy has long been a closely guarded secret, even within Bridgewater Associates itself. A few years ago, some Wall Street heavyweights began digging into the secrets behind his success.
Since founding Bridgewater in a Manhattan apartment in 1975, Dalio has reportedly possessed an uncanny ability to detect shifts in the global economy or political landscape—such as when a country raises interest rates or cuts taxes—and profit from them.
For years, these whispers passed from one trading floor to another across Wall Street.
At its peak in 2022, Bridgewater, a global investing powerhouse, managed $168 billion in assets, making it not only the world’s largest hedge fund but more than twice the size of the second-largest.
Bridgewater’s billionaire founder, Ray Dalio, frequently appears in financial media, openly declaring that he has cracked the so-called “holy grail” of investing—a collection of trading formulas guaranteed to generate profits. “I mean, if you find this thing, you become rich and successful,” he once said.
So why doesn’t anyone on Wall Street know much about it?
Since founding Bridgewater in a Manhattan apartment in 1975, Dalio has reportedly possessed an uncanny ability to detect shifts in the global economy or political landscape—such as when a country raises interest rates or cuts taxes—and profit from them. This both makes perfect sense and no sense at all. Why is Bridgewater better than any other investor in the world at predicting such events?
Bridgewater rose to fame for navigating the 2008 financial crisis, when its flagship fund rose 9% while stocks fell 37%. Mr. Dalio became a sought-after adviser to the White House and the Federal Reserve, attracting new wealthy clients to his firm. Yet the hedge fund’s overall description of its investment methods can be extremely vague.
Dalio often says he relies on Bridgewater’s “investment machine,” a collection of hundreds of quantitative indicators or “signals” that predict whether markets will rise or fall. Bridgewater rarely discloses details of these signals, citing competitive pressure, but says it will buy or sell assets accordingly if the signals suggest future trouble—or even uncertainty—even if Dalio’s own instincts suggest otherwise.
This supposed mastery over basic instincts lies at the core of Mr. Dalio’s identity and is expressed in his published book, “Principles,” which preaches “radical transparency” and lists hundreds of rules for overcoming personal biases. (One rule states: “Not all opinions are equally valuable, so don’t treat them that way.”)
To competitors, investors, and observers, the world’s largest hedge fund seems nothing like a typical Wall Street player. Much smaller hedge funds can move markets merely by rumors of a single trade. Bridgewater’s sheer size should make it the ultimate whale, creating waves every time it adjusts positions. Instead, the firm moves more like a minnow.
What if the secret is that there is no secret? How would outsiders react to that?
The Wall Street Investigators
Bill Ackman was one of the Wall Street figures questioning how Bridgewater makes money.
Three individuals with vastly different backgrounds took three distinct approaches to unraveling the mystery of how Bridgewater takes its positions.
In early 2015, outspoken hedge fund manager Bill Ackman led the charge. The billionaire founder of Pershing Square Capital had long found Mr. Dalio’s public statements about his quantitative investment style too vague, even meaningless.
During a charity event that February, Ackman interviewed Dalio onstage, pressing him on how Bridgewater manages its assets.
Dalio replied: “Well, I think it’s because I can go long or short anything in the world. I’m basically going long liquidity. And being able to go long or short anything in the world, and I can almost go long or short anything.”
He also noted that about 99% of Bridgewater’s trades were automated based on long-undisclosed rules. “They’re my standards, so I’m comfortable with them,” Mr. Dalio said.
Ackman tried another tactic. He gave Dalio a “layup”—a question asked six times an hour on business TV. “Suppose you were going to buy one asset, one stock, one market, or one currency. Where would you put your money?”
After a pause, Dalio said: “I don’t do that.” He then elaborated on how Bridgewater’s hundreds of investment staff spend their days, describing a data-driven approach.
Onstage, Mr. Ackman called it “one of the most interesting conversations I’ve ever had.” But he walked away shaking his head.
“What the hell was he talking about?” he later vented.
Jim Grant, a financial analyst who calls himself a “rational prophet,” watched the interview with astonishment. His obscure newsletter, Grant’s Interest Rate Observer, is popular because many serious investors claim to read it.
Grant had long privately pondered dark questions about Bridgewater. He assigned his senior deputy to investigate deeply. They cast a wide net, carefully reviewing the firm’s public filings and quietly speaking with anyone who might know what was going on.
Grant recalled they were overwhelmed by “winks and nods” from “all sorts of people” saying “something is definitely wrong.” In October 2017, Mr. Grant devoted an entire issue of his publication to Bridgewater, themed around “distraction, flattery” and “mystery.”
The newsletter claimed a series of problems. Shareholders of Bridgewater’s parent company—including employees and clients—did not automatically receive copies of the firm’s financial statements. The newsletter noted that five separate Dalio family trusts each seemed to hold “at least 25% but less than 50% of Bridgewater,” which mathematically seemed difficult.
According to publicly disclosed information, the hedge fund borrowed money from its own auditors, which struck the longtime analyst as unstable and unusual. “We’ll bet the ranch that Bridgewater won’t last,” the newsletter concluded.
On the evening of 8:30, when the report was published, Grant and his wife sat on their living room couch watching a New York Yankees game. When his home phone rang from an unknown number in Connecticut, Grant sent it to voicemail. It wasn’t until about half an hour later that his wife heard a distant beep. She went over, pressed play on the machine, and put the message on speaker. Dalio’s voice came through cautiously and calmly:
According to Grant, “I’m not sure if you’ve seen the latest issue of Grant’s.” Dalio’s call lasted nearly half an hour, detailing his complaints about the article.
Jim Grant dedicated an entire newsletter issue to investigating Bridgewater.
Over the next week, Grant held intermittent calls with several Bridgewater executives. He realized he’d made some key errors regarding the fund’s regulatory filings and auditor relationships. Grant apologized on CNBC, but he said he still remained puzzled about “how the company actually operates.”
All this piqued the interest of Boston-based financial investigator Harry Markopolos, who in the late 1990s was an unknown analyst when his boss asked him to replicate a competitor’s trading strategy that seemed to deliver outsized returns. Markopolos couldn’t do it—but he understood why, so he started talking to the Securities and Exchange Commission. Six years later, when his warnings about Madoff proved correct, Mr. Markopolos earned national acclaim.
According to people who worked with Markopolos, he believed serious issues were unfolding at Bridgewater’s headquarters in Westport, Connecticut. Here was another giant hedge fund whose investment methods seemed incomprehensible to rivals. He obtained Bridgewater’s marketing materials, including summaries of the firm’s investment strategies and detailed charts of fund performance.
Bridgewater described itself as a global asset manager, yet these documents listed no specific assets responsible for gains or losses. Performance charts showed the firm rarely had a down year—even when Mr. Dalio’s public predictions proved accurate, Bridgewater’s flagship Pure Alpha fund seemed to flatline by year-end.
As Markopolos flipped through the documents, a familiar feeling stirred in his gut.
According to three members of Markopolos’s team, they spoke with Texas hedge fund manager Kyle Bass, known for correctly predicting the subprime mortgage market collapse in 2008. Mr. Bass told colleagues he had also long wondered how Bridgewater traded.
Markopolos also visited David Einhorn of Greenlight Capital, the hedge fund billionaire famous for uncovering frauds. Einhorn welcomed Markopolos to his Manhattan office and sat down with his Greenlight analyst team, expressing interest in personally investigating Bridgewater, two people present recalled.
After hearing Markopolos out, Einhorn said it aligned with his own suspicions.
That was all the encouragement Markopolos needed.
In a letter to the SEC, he declared Bridgewater was a Ponzi scheme.
The Inner Circle
The SEC and other regulators dutifully met with Markopolos and his team. The whistleblower’s report was circulated through the agency, and a team launched an investigation. (The SEC declined to comment.)
According to someone familiar with the probe, they concluded partly that the world’s largest hedge fund used a series of complex financial maneuvers—including relatively untraceable trading instruments—to execute seemingly simple investments. That made sense to the SEC. Competitors couldn’t track them.
The SEC was satisfied. It stopped responding to Markopolos and his team’s follow-up requests. Regulators did not bring public charges against Bridgewater.
It turned out that by the time the SEC received Markopolos’s views, it had already investigated Bridgewater. After the Madoff scandal, the SEC never truly scrutinized the world’s biggest hedge fund. The SEC didn’t care much about how Bridgewater made money—only that it actually invested client accounts.
Markopolos submitted a whistleblower report on Bridgewater to the SEC, having earlier earned national acclaim for correctly warning about Madoff.
In fact, very few people at Bridgewater were involved in the day-to-day work of making money for hedge funds.
At its peak, Bridgewater had about 2,000 employees and hundreds of temporary contractors, but fewer than 20% were assigned to investment or related research roles. (The rest handled operational tasks, including expanding Mr. Dalio’s “principles.”)
Among these investment staff, many had responsibilities no more complex than those of an average college student. They conducted economic history research projects and wrote papers reviewed and edited by Dalio.
Current and former investment employees say most researchers knew better than to ask whether these insights were incorporated into Bridgewater’s trades.
At Bridgewater, only a small group—no more than ten people—got to see the “different view.” Dalio and his long-time deputy Greg Jensen selected members from Bridgewater Investment Partners and allowed them into an inner sanctum. In exchange for signing lifetime contracts and vowing never to work at another fund, they were shown Bridgewater’s internal secrets.
Mr. Dalio called this group the “Trusted Circle.”
The Real Show
There are two versions of how Bridgewater invests billions in markets. Mr. Dalio presents one version to the public and clients. Current and former investment employees say the other version is secret.
In the first version, Bridgewater’s hedge fund is the epitome of elite thinking. Any investment professional or researcher can propose an idea, and the Bridgewater team calmly debates its merits, combining it with extensive historical research.
Over time, ideas from investment staff with accurate prediction records gain greater influence and win support from more client capital.
Investors flock in, confident Bridgewater differs from other hedge funds—it won’t rise or fall based on a single trade or prediction by the firm’s founder. It’s Wall Street Darwinism.
Every Friday, Dalio’s assistant delivers a thick briefcase filled with economic research reports, quickly driven to Dalio’s mansion in Greenwich, Connecticut. These materials form the basis of Bridgewater’s so-called “what’s happening in the world” meetings.
Held every Monday morning, Dalio, Jensen, and Bridgewater’s long-time co-CIO Bob Prince sit at the front of the largest room, where a river winds around a cluster of medieval-style buildings. Rows of staff sit before them, along with the occasional curious visiting client invited to watch the show.
Greg Jensen, one of Dalio’s long-time deputies and a member of Bridgewater’s trusted circle of shareholders.
Filmed by cameras so others in the company can watch later, people in the room debate major topics for hours. It’s quite a spectacle.
Yet it has almost nothing to do with what Bridgewater actually does with its money.
After the meeting ends, the Trusted Circle files into a cramped corner of the office—rarely accessible to others—and the real work begins.
The Trading Game
The Trusted Circle does exist. But employees say that although multiple people may weigh in, in reality, only one investment opinion matters in the firm’s flagship fund. There is no grand system, no real artificial intelligence, no holy grail. Only Mr. Dalio giving orders by phone, from his yacht, or from his villa in Spain during several weeks each summer.
Dalio and Bridgewater’s lawyers say the hedge fund “is not a one-man show, as 98% of decisions are made by the system.” They say claims that “Mr. Dalio gives orders for Bridgewater investments” are false.
Dalio primarily oversees the main fund, Pure Alpha, and established a set of “if-then” rules. If one thing happens, then another follows. For Pure Alpha, such a rule might be: if a country cuts interest rates, its currency will depreciate, so Pure Alpha shorts the currency of countries cutting rates.
Many rules simply follow trends. They assume short-term movements may signal longer ones and depend on momentum across markets.
These rules gave Bridgewater a clear edge in the late 1980s and 1990s, when most of Wall Street—from junior traders to billionaires—still believed in the value of their instincts.
But over time, Dalio’s advantage faded and seemed to halt entirely in the 2010s and beyond. The rise of powerful computers allowed any trader to easily code rules and trade by them. Competitors quickly caught up to Dalio’s discoveries and then surpassed them in areas like high-frequency trading. Dalio still clings to his historical rules today. (“They are timeless and universal,” he told one interviewer.)
Although Bridgewater’s assets under management slowly shrank below $130 billion in the post-pandemic era, it remains the world’s largest hedge fund—far bigger than any rival—and continues raising capital from nearly every corner of the globe.
Even though Bridgewater’s main hedge fund has trailed global markets for years, it has largely avoided severe downturns. So it’s fair to say it has made money for clients on an absolute basis. Its growth reflects the firm’s marketing power, which lent mystique to Pure Alpha’s hands-off, rules-based approach.
This stagnation led Bridgewater to create the “Trading Game,” a simulation of the real world where investment staff bet their best ideas against a pool of money belonging to Mr. Dalio. (If a staffer’s idea wins, they get cash rewards.)
For many in the investment division, this was the only time in their Bridgewater careers they could actually implement an investment idea.
“Give Them a Helicopter”
Investors say 2011 to 2016 was a boom period for markets, yet Pure Alpha delivered only low single-digit returns, far below historical levels, and the next five years weren’t much better.
Dalio and Bridgewater went to great lengths to protect this edge.
On Wall Street, the term “information edge” often carries improper connotations, implying insider trading. Yet Dalio’s information edge is both legal and massive.
Bridgewater targets information about entire nations. According to employees involved, Dalio actively cultivated well-connected government officials, from whom he could infer plans to intervene in economies—and Bridgewater used these insights to profit in its funds.
Anywhere, this seemed like “fair game,” even in Kazakhstan.
Bridgewater built relationships with government officials in Kazakhstan, the second-largest oil producer among former Soviet republics.
This Central Asian nation doesn’t appear on page one of any Wall Street handbook. Ruled by an authoritarian regime, it’s the world’s largest landlocked country, yet sparsely populated.
In 2013, Kazakhstan began developing its most expensive oil project yet—a massive offshore field in the Caspian Sea—helping establish a $77 billion sovereign wealth fund. This money needed to be invested somewhere, and Bridgewater’s client services team scheduled a meeting on Dalio’s calendar with the fund’s CEO, Berik Otemurat, a bureaucrat whose career had begun just a decade earlier.
Dalio showed intense interest in the delegation. “What were they doing before?” he asked Bridgewater’s marketing team.
His subordinates replied that Mr. Otemurat would arrive in Westport a few hours after landing in New York.
“How are they getting here?” Dalio asked next.
Bridgewater arranged a Mercedes driver.
“Send them a helicopter.”
The dramatic arrival preceded an unconventional presentation—at least compared to what Mr. Otemurat had experienced in New York. There, industry titans like KKR co-founder Henry Kravis and Blackstone’s Stephen Schwarzman took turns flattering him, offering bass, caviar, and orange hazelnut Napoleon pastries themed to Kazakhstan’s flag.
Dalio drew an indecipherable chart on a dry-erase board and rambled vaguely about the nature of markets. According to one person present, he barely mentioned Bridgewater’s specific practices. Yet it all carried undeniable charm and confidence.
Bridgewater’s marketing team had seen this routine before. The end goal wasn’t immediate cash. So when Otemurat floated the possibility of investing $15 million in Bridgewater’s flagship hedge fund, the fund’s representatives declined. “We don’t want to do this deal with you now,” said one marketing executive. “We’re playing the long game.”
Inside Bridgewater, relationships meant access. The country’s new oil field development took over a decade and was almost constantly delayed. Anyone aware of the project’s progress could adjust bets on oil accordingly. Bridgewater’s representatives told the delegation the firm would gladly offer free investment advice, while Bridgewater’s team was equally happy to have the chance to ask questions about local industries.
Mr. Otemurat and others in the delegation seemed eager to chat.
Soon, Bridgewater achieved a two-pronged victory. Months after Otemurat’s visit to Westport, the Kazakh fund asked again about investing in Bridgewater. Former employees say this time the amount under consideration was far more than $15 million, and Bridgewater agreed.
A spokesman for Dalio said all his interactions with government officials were proper.
No One Will Know
Compared to her predecessor, Janet Yellen kept greater distance from Dalio.
Back in the U.S., Dalio’s influence was slowly waning. During and after his period of fame in the financial crisis, he effortlessly accessed Federal Reserve Chair Ben Bernanke. But Bernanke’s successor, Janet Yellen, clearly showed less interest in the Bridgewater founder. Dalio often complained to colleagues that Yellen didn’t return his calls or meet with him.
But Dalio continued achieving greater success abroad. Mario Draghi, born in Italy, served as President of the European Central Bank from 2011 to 2019 and frequently chatted with the Bridgewater founder, seeking his advice.
In the mid-2010s, Dalio advised him to introduce more stimulus measures for the EU, which would boost European stocks and weaken the euro. For much of that period, Bridgewater’s funds also shorted the euro.
In Zurich, Dalio gained the “ear” of the Swiss National Bank. According to a former Bridgewater employee who helped build the connection, he advised the bank to try detaching the Swiss economy from the struggling broader Europe. In early 2015, when the Swiss National Bank scrapped the franc’s peg to the euro, Bridgewater’s funds made a fortune.
In media interviews, Dalio consistently praised leaders of many nations. He repeated “very capable” over and over, sometimes multiple times in a single interview. He also told people inside Bridgewater that these leaders quickly sought his advice.
Flipping a Coin
Dalio’s grand automated system—his investment machine—is far less automated or mechanical than advertised. If he wants Bridgewater to short the dollar (as he did for about a decade after the 2008 financial crisis, without success), the trade happens. Nothing matters more than what Dalio wants.
As 2017 approached, some top investment staff had had enough. Pure Alpha had risen only 2% that year, far below most other hedge funds.
To reverse the firm’s investment performance, members of the Trusted Circle studied Dalio’s trades. They delved deep into Bridgewater’s archives, searching for the history of Dalio’s personal investment ideas. The team crunched the data over and over.
According to current and former employees present, they then sat down with Dalio. (Dalio and Bridgewater’s lawyers say no study of Dalio’s trades was commissioned, nor were meetings held to discuss these issues.)
A young employee handed over the results with trembling hands: the analysis showed Dalio was right about as often as he was wrong.
Trading based on his ideas often resembled flipping a coin.
The group sat silently, nervously awaiting the founder’s response.
Mr. Dalio picked up the paper, crumpled it into a ball, and threw it away.
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