Bridgewater Associates average return over the last 28 years has been 11.5% per year. This number is important because it’s nearly double the average yearly return of the S&P 500, which is about 7%. When you beat the market by five or six percent every year for almost three decades, you will get some attention. Ray Dalio has been the man behind the money, growing one of the world’s biggest hedge funds, managing about $160 billion in assets.
From Zero to Billions
When you start from zero and get to the top of your industry, there’s naturally going to be critics not only calling for your demise but wishing it to come true. Competition is fierce, and there’s intense pressure to attract new funds and grow Assets Under Management (AUM). But Bridgewater seems to get treated especially critically, mostly due to its outspoken founder. If you’re Ray Dalio, you have to be thinking at times; maybe it would be easier to let the Bridgewater Associates average return do the talking.
His company culture is sometimes debated and criticized, where he encourages, “radical transparency.” Former employees complain of the atmosphere that’s been bred over the years. Naysayers tie the underperforming years in the funds to the unconventional management structure put in place by Dalio. Maybe if Bridgewater would just conform to a more typical approach, returns would be higher, critics will argue. Once you learn more about what drives Dalio, you understand that there’s only one path to travel.
Bridgewater Associates Beginnings
Bridgewater Associates was started in 1975 by Ray Dalio, but the ideas behind the company began much earlier than that. Born in Queens and growing up in the New York City suburb of Long Island, young Ray began finding ways to make money. Like many kids, he had a paper route and mowed lawns for spending cash. When he was 12 years old, he began working as a caddy at the Links Golf Club, which happened to be one of the most exclusive golf courses in the area.
During the 1960s, the stock market was doing well, and the golf course was buzzing with talk about how to invest in the markets. This caught Ray’s attention, and at the age of 12, he decided to take the plunge purchasing $300 worth of Northeast Airlines for his first stock market investment. The stock nearly tripled in no time flat, and young Ray was hooked on the markets and investing.
Ray wasn’t the greatest student initially, but focusing on stock market investments helped guide him through his undergrad studies. As a fan of music and the Beatles, the biggest band at the time, he stumbled on the practice of meditation because of the band’s interest in the subject. Dalio followed the band’s lead, where he began practicing Transcendental Meditation, which he credits improving his ability to concentrate and think creatively. Eventually, his newly formed habits of focus landed him at Harvard Business School.
In 1975, Ray launched Bridgewater Associates, and the 26-year-old was in business. He began by advising corporate clients by writing research reports on currency and interest rate risk. Bridgewater created great research and attracted high-profile clients. In 1985, Ray landed the World Bank’s employee retirement fund as a client, followed by Kodak’s retirement account soon after.
Alpha and Beta
To understand the growth of Bridgewater, we need to understand Alpha and Beta. These are terms used by hedge funds to measure and explain the performance of stock and investment funds. Alpha is the excess return relative to a benchmark, and Beta is the measure of volatility relative to a benchmark. To make this as simple as possible here’s what everyone wants; the highest return with the least amount of risk. Everyone wants that, doesn’t it sound great? The hedge fund industry grew from the idea that it could deliver, or at least attempt to deliver, excessive returns with lower risk. It’s an amazing sales pitch to anyone with money looking for a safe place to grow it.
Let’s suppose your job is to walk into large organizations’ offices and ask them to manage their money for them. What do you say to them? You would say something to the effect of, “I can generate higher returns for you with less risk.” Next, they would ask, “How?” You would respond with “Pure Alpha.”
Pure Alpha was the name of the fund launched by Bridgewater Associates in 1991 to grow its client base. And that’s exactly what they did. With “Pure Alpha” and the addition of the “All Weather” fund in 1996, Bridgewater grew from $5 billion in assets under management to $38 billion by 2003. Not only did they successfully pitch their management services to pensions and corporations, but they also delivered returns. In June of 2000, Bridgewater was ranked the number one global bond manager for the previous five years by Pensions & Investments magazine.
Bridgewater Associates Average Return
Assets under management went from $38 billion to $50 billion by 2007, setting the stage for Bridgewater to show it’s versatility in navigating the global financial crisis. Dalio and his team emerged from the 2009 market plunge stronger than ever, and AUM reached $100 billion by 2011. By this time, Bridgewater was attracting lots of attention for its growth in AUM, outstanding returns, and also for its unique company culture.
An Honest Attempt to Educate and Inform
Dalio became outspoken when asked what made Bridgewater a uniquely successful company. He began to share his honest opinions on what he’s learned over his career, and those opinions somehow became controversial. He argued that the biggest barrier to rational decision making was “the ego barrier,” which was the desire to be right and prove others wrong even when the evidence was going against you. He also developed a culture of “radical transparency,” where all criticism of co-workers would be encouraged as long as it led to learning and growth.
For a company that began publishing research to clients before it managed their money, Dalio has practiced what he preached at Bridgewater. He shares an enormous amount of information and ideas about the global economy, management, and finance. During the financial crisis, Dalio published an essay titled “A Template for Understanding What Is Going On,” where he explained his take on the global economy’s current deleveraging process. His take was correct; the Pure Alpha fund gained 9.5% while other funds were hit with enormous losses.
In 2010, the Pure Alpha fund gained an incredible 45%, an astounding $15 billion gain for the massive fund. 2011 saw another year of success where the Pure Alpha fund gained 23% while the average returns for other hedge funds were negative 4%.
Ray Dalio and his Bridgewater Associates average return on the Pure Alpha fund has been about 12% since it’s existence. It’s All Weather fund has returned 7.8% since it’s inception and positive returns in every one of the last 18 years. Currently, Bridgewater manages more than $160 billion in assets for about 300 clients, including central banks, university endowments, and public and corporate pension funds.
Pain Plus Reflection Equals Progress
Ray Dalio has been generous in giving his money and his opinions over the years. He’s crafted videos on how he believes the economy works to help people understand how to manage their own financial situations best. He often gives interviews, sharing details of the culture inside the company he founded. Some will say this is all in the name of self-promotion and ego-driven publicity for Bridgewater, but I’d like to believe he’s sincere in his efforts to educate and inform.
When you have a net worth of almost $17 billion like Ray Dalio, you really don’t have to do anything you don’t want to do. You could choose to live a private life and not comment on the current social challenges we face. But Dalio doesn’t do that; he’s outspoken about many social issues like rapidly growing wealth inequality.
He openly discusses how to better yourself and your circumstances. He calls his formula for success in one of his favorite quotes: “pain plus reflection equals progress.” He goes on to explain that our most painful moments are also the most important. Instead of running away from the pain, we need to identify it and learn how to use it to improve ourselves.