Jim Grant, author of Grant’s Interest Rate Observer, first hinted last week that not all is well when it comes to the world’s biggest hedge fund, Ray Dalio’s 0 billion Bridgewater (of which one half is the world’s biggest risk-parity juggernaut). Speaking to Bloomberg last week, Grant said he was “bearish” on Bridgewater because founder Dalio has become “less focused on investing, while the firm lacks transparency and has produced lackluster returns.” Grant slammed Dalio’s transition from investor to marketer, and in a five-page critique of the world’s largest hedge fund, said Dalio has been preoccupied with his new book, sitting for media interviews and sending Tweets. “Such activities have one thing in common: They are not
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Jim Grant, author of Grant’s Interest Rate Observer, first hinted last week that not all is well when it comes to the world’s biggest hedge fund, Ray Dalio’s $160 billion Bridgewater (of which one half is the world’s biggest risk-parity juggernaut). Speaking to Bloomberg last week, Grant said he was “bearish” on Bridgewater because founder Dalio has become “less focused on investing, while the firm lacks transparency and has produced lackluster returns.”
Grant slammed Dalio’s transition from investor to marketer, and in a five-page critique of the world’s largest hedge fund, said Dalio has been preoccupied with his new book, sitting for media interviews and sending Tweets.
“Such activities have one thing in common: They are not investing,” Grant writes in the Oct. 6 issue of his newsletter. “Yet here he is, laying it all out to the world again, Tweeting, promoting his book, attacking the press — necessarily doing less of his day job than he would otherwise do.”
Grant continued his scathing critique, accusing Bridgewater of “lately performed no better than the typical hedge fund.” Grant is right: since the start of 2012, Bridgewater’s Pure Alpha II Fund has posted an annualized return of 2.5% vs its historic average of 12%, and is down 2.8% this year through July.
The underperformance may be explainable: after all the polymath billionaire has been busy opining in recent months on subjects from the rise of populism to his affinity for China, “which are distraction from making money” Grant said.
But if Grant had limited himself to merely Dalio’s stylistic drift, it would be one thing: to be sure, the fund’s billionaire founder may simply have lost a desire to manage money and has instead discovered a flair for writing books and being in the public spotlight.
However, Grant – or rather his colleague Evan Lorenz – went deeper, and as he writes in the latest Grants letter, he raises several troubling points, which go not to the hedge fund’s recent underprofmrance – which can be perfectly innocuous – but implicitly accuse the world’s biggest hedge fund of borderline illegal activities and, gasp, fraud. Some of the more troubling points brought up by Lorenz are the following:
- Bridgewater has directly lent money to its auditor, KPMG, to which KPMH’s response is that “these lending relationships . . . do not and will not impair KMPG’s ability to exercise objective and impartial judgment in connection with financial statement audits of the Bridgewater Funds.”
- Bridgewater has 91 ex-employees working at its custodian bank, Bank of New York.
- Only two of Bridgewater’s 33 funds have a relationship with Prime Brokers. In these two funds, Bridgewater Equity Fund, LLC and Bridgewater Event Risk Fund I, Ltd., 99% of the investors are Bridgewater employees.
- Opaque ownership concerns: “Two entities—Bridgewater Associates Intermediate Holdings, L.P. and Bridgewater Associates Holdings, Inc.—are each noted as holding 75% or more of Bridgewater.”
- Why the massive, and expensive, ETF holdings: “The June 30 13-F report shows U.S. equity holdings of $10.9 billion. The top-16 holdings, worth $9.5 billion, or 87% of the reported total, come wrapped in ETFs, including the Vanguard FTSE Emerging Markets ETF, the SPDR S&P500 ETF Trust and the iShares MSCI Emerging Markets ETF. Beyond the fact that Bridgewater reports holding few U.S. equities, you wonder why such a sophisticated shop would stoop to such a retail stratagem. Surely the Bridgewater brain trust could replicate the ETFs at a fraction of the cost that the Street charges.”
- And perhaps most troubling, is the SEC in cahoots with Bridgewater? “Lorenz asked the SEC how Bridgewater’s answers comply with the requirement to “[p]rovide your fee schedule.” Via email, the agency replied, “Decline comment, thanks.”
And so on. There is much more in the full Grant’s note, transcribed below which everyone who has even a passing interest in Bridgewater should read (and of course subscribe to Grant’s, which together with 13-D, are the two best newsletters on Wall Street).
* * *
The face on the Wall Street milk carton
Ray Dalio, founder, chairman and co-chief investment officer of Bridgewater Associates, L.P., is going public—personally. He has written a book, given a TED talk, sat for interviews, dueled with journalists (or, as he styles them, “journalists”) and paid money—actually paid—to promote his tweets. Such activities have one thing in common: They are not investing.
Distraction, sycophancy, mystery and, of course, interest rates are the topics at hand. In preview, Grant’s is bearish on the world’s biggest and most client-enriching hedge-fund organization.
As Bridgewater is closely held, this must be a conceptual short-sale. It’s no less important for that reason, we think. At major market inflection points, someone is revealed to have zigged when he should have zagged. One thinks, in recent years, of Lehman Brothers Holdings, Inc. (2008), Long-Term Capital Management, L.P. (1998) and Drexel Burnham Lambert, Inc. (1990); and in ancient times, in the City of London, of Overend, Gurney & Co. (1866) and Baring Brothers & Co. (1890). Nobody knows when today’s credit-enhanced, central-bank-infused, interest-rate-inflated updraft in asset prices will run its course, still less the name of the firm with which history will associate that inflection point. For the latter distinction, Grant’s is penciling in the name of the firm that Dalio built.
Bridgewater’s success is a matter of figures, its eccentricity a matter of opinion. Anyway, “eccentricity” is a relative term in the investment business. On the one hand, the man who displaces George Soros at the top of the heap as the all-time net money-maker, as Dalio is said to have done in 2015, is allowed to tape-record all the meetings he wants (it’s just what Ray does). On the other hand, if that same man, in a setting of mediocre returns and declining assets under management, chooses to persist in tape-recording his meetings, people may start to wonder if something isn’t off. We say that something is.
Dalio’s new book, Principles (we’ve purchased copies for distribution at the Oct. 10 Grant’s Conference —advt.), documents not just the oddity of the firm and its founder, though there’s plenty of that to marvel at. The reader may remark, too, at Dalio’s affinity for the People’s Republic of China and its communist kingpins. Concerning Wang Qishan, one of the senior head-knockers in the ruling politburo, for instance, Dalio has this to say: “Every time I meet with Wang, I feel as if I get closer to cracking the unifying code that unlocks the laws of the universe.”
Compound rates of return are apolitical. Left-wing crotchets were neither here nor there when Soros broke the Bank of England in 1992. Nor do Dalio’s politics count, whatever they might be. What matters are facts, returns and—a particular touchstone at Bridgewater—transparency.
“Mr. Dalio,” reported The Wall Street Journal on Sept. 8, “has repeatedly instructed Bridgewater’s hundreds of investment researchers to be careful about writing outright negative outlooks about China, reminding them that he is sanguine about its long-term prospects.”
Dalio, who sat at the head of a Bridgewater executive committee he called the “politburo” and who (again according to the Journal) is a frequent visitor to China, a donor of “tens of millions of dollars” to Chinese charities and the would-be manager of a new fund to manage billions in domestic Chinese assets, is in no position of intellectual flexibility with respect to what might prove the world’s No. 1 macroeconomic problem. There’s no such thing as a kowtowing analyst.
“In one long sentence,” Dalio summarized the message of his new book in a Sept. 23 blog post on LinkedIn, “our success occurred because we created a real idea meritocracy in which the goal was to have meaningful work and meaningful relationships and the way we went after them was through radical truthfulness and radical transparency” (Dalio supplied the emphasis).
Seventy-four comments were overwhelmingly positive. Queried one: “Is there a platform to vote Ray Dalio as president of planet earth? These principles will do our world a lot of good.” Raved another: “Wow! Great masterpiece. Very inspiring and informative. Will definitely get a copy.”
Dalio’s book proceeds from a view of the supposed duality of the human mind, the base portion and the elevated one. The trick is to beat back the former and unlock the latter. Which leads to such principles as, “Understand the great brain battles and how to control them to get what ‘you’ want” and “Realize that the conscious mind is in a battle with the subconscious mind” and “Know that most constant struggle is between feeling and thinking.”
Principles tells how it’s done. Embrace the pain of the struggle, Dalio says. It will open your eyes to the world as it really is. It will allow your mind to grow. Thus, Principle 1.5: “Evolving is life’s greatest accomplishment and its greatest reward.” Not that this evolution registers mainly in the individual; it’s the species that counts. Hence, codicils A and B to 1.5: “The individual’s incentives must be aligned with the group’s goals” and “Reality is optimizing for the whole—not you.”
Life’s journey is a kind of arcade game, Dalio goes on. Solve a problem and get a prize—not a kewpie doll, but a principle. The principle helps with the next problem. Applying those principles, one never need make the same mistake twice. One can, indeed, graduate to “higher and higher levels of play in which the game gets harder and the stakes become ever greater.” He himself has climbed this mountain.
“Radical truthfulness” is the way forward, Dalio says. Evolved individuals, shorn of ego and defensiveness, just come out and say what’s on their minds, never mind so-called feelings. “Radical transparency” makes this seemingly awkward plan of action feasible. It’s why tape recorders are running while Bridgewater’s 1,500 employees sit down to talk (and keep right on talking).
In the end you achieve an “idea meritocracy,” in which the best notions emerge from “thoughtful disagreements.” How does an idea win? By vote. How are the votes counted? Why, they are weighed, not counted. The “believability” of the voter is what decides the weight. And who judges believability? The Bridgewaterians rate one another. Successful employees are “wise” and “practical”; they are “living the truth” and “willing to touch the nerve.” The Bridgewater HR department tots up the results of these personnel appraisals and records them on the employee’s individual files, their “baseball cards.”
There are other investment processes. Robert Soros described his father’s to Time magazine: “I mean, you know [that] the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s this early warning sign.”
. . .
After big showings in 2008 and 2010, Bridgewater has lately performed no better than the typical struggling hedge fund. According to The New York Times, Dalio’s Pure Alpha strategies (hedge funds of one kind or another) were up by 4.7% in 2015 and 2.4% in 2016, while All Weather (deployer of the socalled risk-parity technique, of which more below) was down by 6.9% in 2015 and up by 12.8% in 2016. For comparison, the S&P 500, with dividends reinvested, delivered 1.4% in 2015 and 12% in 2016. Nor were the first eight months of 2017 any kinder to Bridgewater’s clients. According to a Sept. 7 article in Institutional Investor’s Alpha, the Pure Alpha strategies were down by 1.3%–2.4% in the year through August while All Weather was up by 8.5%. The humble S&P 500 delivered 11.3% over the same stretch.
“In 2010, according to Principles,” as colleague Evan Lorenz relates, “two of Bridgewater’s Pure Alpha funds were up by 45% and 28%, while All Weather gained 18% (the quoted returns appear to be before fees). Such gains may have made Bridgewater, which manages $164 billion, too big to put up continued superlative results, or perhaps it inspired too many copycat risk-parity funds to compete away the opportunity set. The firm towers over other hedge-fund managers, such as Citadel, LLC (which manages $27 billion), D.E. Shaw & Co., L.P. ($43 billion) and Two Sigma Investments, L.P. ($40 billion). Norway’s Government Pension Fund Global ($1 trillion) was up by 2.7% and 6.9% in 2015 and 2016, respectively, and is up by 2.6% so far this year. Compare Norway and Bridgewater, relative giants, to certain university endowments. Harvard’s, totaling $37.1 billion, was up by 8.1% in the fiscal year ending June 30, 2017. This, according to a Sept. 20 Harvard Crimson report, made the endowment ‘the worst of almost 20 institutional investors who have released their figures for fiscal year 2017.’”
In one respect, the Bridgewater front office resembles Donald Trump’s White House more than it does Xi Jinping’s politburo; people come and they go. The succession plan that Dalio announced six years ago—he would step down as CEO in 2011—died aborning. He hasn’t stepped down, and a succession of six different individuals by our count have served as either co-CEO or co-chairman since.
Press coverage of the C-suite has rankled the apostle of radical truthfulness. To stem leaks of the thoughtful disagreements among his top lieutenants and between them and himself, so the Journal reported late last year, Dalio is withholding firm-wide access to recordings of upper-echelon staff meetings. The decision, regrettable though it might have been, was not without its compensation, as a principle comes attached to it. The principle is this: “Expect those who receive the radical transparency to handle it responsibly and don’t give it to them if they can’t.”
The combination of CEO succession drama and lackluster investment performance would take its toll on any investment-management organization— last year came reports that the University of California’s Board of Regents pulled $550 million from Bridgewater over (among other things) “concerns about the future direction of Bridgewater’s leadership.” Perhaps the real story at Bridgewater is how well its assets have stuck, considering. Compared with $169 billion in 2015, as the The Wall Street Journal reported, the firm looks after only five billion fewer dollars today.
Out of that grand total, Pure Alpha—the basic 2%-and-20%-style hedge-fund strategy—accounts for $83 billion. All Weather claims $57 billion, and Optimal Portfolio (a mix of the two) holds another $25 billion.
Which brings us to “risk parity.” It’s the investment-management technique that Dalio pioneered in the company of, among others, Cliff Asness, co-founder of AQR Capital Management, LLC. Follow along as the adherents of risk parity say their piece:
[Assume] that bonds return just what stocks do, or would, if the risks of each were properly weighed. And let us further assume that bonds and stocks show opposite sensitivities to upside surprises in the measured rate of economic growth—bonds depreciating, stocks zipping higher. Crediting these propositions, one could improve on the standard [60%-40% stocks-to-bonds asset mix] by adding to the bond quotient. Because bonds are inherently safer than stocks, the argument goes, a dollop of leverage would improve returns without unreasonably adding to risk.
There’s no standard issue risk-parity portfolio— the idea is you build your own, selecting its constituents by their quotient of risk rather than by their value in dollars. One could imagine an idealized risk-parity portfolio weighing in at 60% bonds and 40% stocks—with a seasoning of (let us say) commodity futures, emerging-markets debt and non-U.S. sovereign debt pushing gross exposures well over 100% of the investor’s capital. Leverage finances the extra increment of asset.*
The big idea is to earn the diversified premia that stocks, bonds, commodities and inflation-linked bonds should (by the lights of experience) earn over cash. It pushes Dalio’s pain button to hear his prized investment stratagem demeaned as merely “a leveraged bond portfolio.” Be that as it may, as Lorenz observes, All Weather’s returns have tracked those of an unleveraged portfolio of long Treasurys over the past two decades. Thus, from 1996 through Aug. 30, 2017 the Wasatch-Hoisington U.S. Treasury Fund has returned a compound 7.9% net of fees. Over the same span, according to a Sept. 8 article in The New York Times, All Weather returned an identical 7.9% net of fees.
You know what they say about past performance. It certainly guarantees nothing in the context of post-2007 radical monetary nostrums, including the first-in-5,000-years sighting of substantially
negative nominal bond yields. For our part, we dispute that any asset class is intrinsically safer or riskier than any other asset class; price and value decide the question. The trouble is that nearly every market is inflated nowadays, stocks being the richest they have ever been (as measured by the Shiller cyclical adjusted price/earnings ratio) but for 1929 and the dot-com bubble. Looking for safe harbor in the Treasury’s inflation-protected securities, e.g., the 3/8s of July 15, 2027? Good luck to you! They’re priced to yield all of a real 0.47%.
What’s risk? You may define it as the odds on a permanent impairment of capital. The practitioners of the All Weather method define it as volatility. Thus, for the manager of a risk-parity portfolio, current depressed readings in the VIX and in realized volatility constitute a stock market buy signal. It will be a lively day on Wall Street if, in response to an upside spike in volatility, risk-parity portfolios have to unwind all at once. (For more on this, see the issue dated May 5.)
. . .
Dalio has done his best work in the shadows. In a 1982 Wall Street Week interview, he predicted not the great bull market but a new calamity (the erroneous call nearly bankrupted Bridgewater). In a 1992 Barron’s article, he wrote that the country was in a depression and that it would be hard-pressed to escape from it. Dalio is an original thinker—Bill Gates, Elon Musk and the late Steve Jobs are other examples of the type, he says—and therefore inclined to take non-consensus positions. Sometimes they work out, sometimes not. Better, he himself seems to have discovered, that he try out his ideas in private, rather than risking the ridicule (or, just as distracting, the celebrity) that comes with public exposure.
Yet here he is, laying it all out to the world again, tweeting, promoting his book, attacking the press—necessarily doing less of his day job than he would otherwise do. Why? Because the world needs him. “For Dalio,” as CIO Magazine summarizes the gist of a Sept. 27 interview with the father of risk parity, “the current issue at hand is for people to come together and have ‘thoughtful disagreements’ concerning their conflicts, especially since the divergences are now possibly much greater than they have ever been. These political and social differences are one of the main reasons as to why he feels that—in a world where timing is everything (especially in the markets)— the best possible time to release the first phase of Principles is now.”
. . .
The Teacher Retirement System of Texas has a unique relationship with Bridgewater. The chief investment officer of TRS from December 2006 through June 2017 was T. Britton Harris IV. In 2003, as the then–CIO of Verizon Investment Management Corp., Harris was the first institutional investor to buy into the All Weather fund; prior to that, All Weather managed Dalio’s family assets. For five brief months in 2005, Harris served as the CEO of Bridgewater itself. (Upon his exit, Pensions & Investments reported that Dalio called Harris a “poor cultural fit.”) While at TRS, Harris not only invested in Bridgewater’s All Weather, Pure Alpha and Optimal Portfolio funds, but he also directed TRS to purchase a 2.5% stake in Bridgewater itself for $250 million. Including that stake, TRS has $2.1 billion invested in Bridgewater funds or Bridgewater itself as of June 30.
(As of June 30, TRS marked its 2.5% stake in Bridgewater to $363.6 million, giving Bridgewater an implied valuation of $14.5 billion. This values Dalio’s firm at 9% of assets under management. For comparison, publicly traded hedge-fund managers Och-Ziff Capital Management Group, LLC and Oaktree Capital Group, LLC trade at 5% and 7% of AUM, respectively.)
The New York Times, recently at work on a story about Bridgewater, submitted a request under the Public Information Act of Texas for details that Bridgewater would rather not have disclosed. The CFO of Bridgewater, Nella Domenici, registered the firm’s objections in a June 5 affidavit: “These documents contain information that constitutes private, valuable and commercially sensitive trade secrets that, if disclosed, would substantially harm Bridgewater’s ability to compete in the marketplace.” And what data, exactly, did Domenici worry about divulging? The list includes “fee structure,” “litigation exposure,” “related party information” and “debt structure, including sensitive, non-public information pertaining to our existing financing,” among other items. Why the world’s largest and most successful hedge fund, headed by the world’s 54th richest person, has a “debt structure” at all is a good question.
The watchful Paul J. Isaac, CEO and founder of Arbiter Partners Capital Management, read the affidavit and emailed his reactions: “Remarkable and a bit inexplicable. Bridgewater presumably presumably raises a great deal of money from public bodies. There is an implicit assumption here that ‘sunlight’ rules that apply to a host of public relationships should not apply to Bridgewater.”
Registered investment advisors are under the annual obligation to file Form ADV with the U.S. Securities and Exchange Commission. On this document are recorded management fees, among other facts and figures. The SEC’s instructions for the fee section of the report are plain and simple: “Describe how you are compensated for your advisory services. Provide your fee schedule. Disclose whether the fees are negotiable.”
Renaissance Technologies, LLC, no more welcoming to prying eyes than Bridgewater, complies with that directive. So does risk-parity competitor AQR Capital Management. They note the performance and management fees (or range of fees) charged for each strategy managed as a percentage of net profits and assets under management.
Dalio & Co. opts for a qualitative approach, as if the SEC were suggesting a course of action rather than, say, requiring it: “Bridgewater offers fee arrangements which vary by strategy and may involve management fees (generally a percentage of assets), performance fees (generally a percentage of profits) or some combination of the two. For new client relationships, Bridgewater’s standard minimum fee is expected to be $500,000 for its All Weather strategy, $4,000,000 for its Pure Alpha and Pure Alpha Major Markets strategies, and $2,700,000 for Optimal Portfolio.” No percentage of assets or profits is vouchsafed.
Lorenz asked the SEC how Bridgewater’s answers comply with the requirement to “[p]rovide your fee schedule.” Via email, the agency replied, “Decline comment, thanks.”
The “related party information” schedule of the Bridgewater ADV form records the fact that Bridgewater lends money to its auditor, KMPG, LLC. Or, more precisely, Bridgewater owners with a greater- than-10% ownership stake in the Dalio firm are creditors to KMPG.
Long legal sentences parse this curious relationship, for it would seem to fly in the face of the SEC’s Rule 2-01(c) (1)(ii)(A) of Regulation S-X, known as the Loan Rule. This rule prohibits an auditor from borrowing from an auditing client. Or that’s what it appears to say. Investigation and ponderation lead Bridgewater and KMPG to conclude that the Loan Rule does not apply to them in this instance. (Fidelity Management & Research Co. got itself a non-action letter from the SEC for a very similar harmless and inconsequential lender-creditor relationship, the document explains.) Leaving no stone unturned, KMPG likewise consulted its conscience. The verdict here, too, was favorable, because “these lending relationships . . . do not and will not impair KMPG’s ability to exercise objective and impartial judgment in connection with financial statement audits of the Bridgewater Funds.” It’s as if Dalio & Co. had never lent the auditor a dime (just how much money was lent and at what rate of interest go unmentioned).
“After reading that footnote,” Lorenz observes, “an investor may take a measure of solace from the fact that the custodian of many Bridgewater funds is Bank of New York Mellon Corp., the world’s largest custodian bank. An investor may take less comfort from the fact that many of the BoNY employees working on the Bridgewater account are, in fact, former Bridgewater employees. In December 2011, Bridgewater signed a deal with Alexander Hamilton’s old bank: Bridgewater fired 91 back-office employees; BoNY hired these 91 practitioners of radical transparency to work Bridgewater’s books in an outsourcing contract.”
There is no such clarity about how much financial leverage Bridgewater employs. The firm’s so-called regulatory assets, which incorporate securities financed with borrowed money, foot to $239.3 billion. Given that unleveraged client assets amount to $164 billion, Bridgewater borrows no more than 50 cents for every dollar of investor capital. The second- and third-largest hedge funds, Millennium and Citadel, appear to borrow around $5 for every dollar of client funds. Then, again, Bridgewater, a macro fund, makes heavy use of the futures markets. Whether it reports those exposures on a net or gross basis is unspecified.
“Which raises more questions,” Lorenz notes. “Filers of an ADV form check boxes to identify the businesses in which they’re engaged. Bridgewater ticks only one: ‘commodity pool operator or commodity trading advisor (whether registered or exempt from registration).’ You’d expect that a firm as large and active as Dalio’s might also mark ‘futures commission merchant.’ An FCM is ordinarily a member of the futures exchange on which it operates, and membership has its privileges, such as lower trading fees, cheaper margin accommodation and the ability to buy at the bid and sell at the offer.
Then, too, as an exchange member, Bridgewater would be better able to match its orders off of exchange order flow—and to protect its secrets.” Then, too, membership has its obligations. Futures commission merchants must file financial reports with the National Futures Association and the Commodity Futures Trading Commission. They must meet and maintain a minimum net capital standard. It is not the kind of disclosure for which Dalio has shown much enthusiasm in the past.
Mysterious are the ways of the firm, observes a student of Bridgewater, who asks to go nameless. The Dalio organization must trade trillions of dollars’ worth of futures, derivatives, currencies, etc., he speculates. It belongs to no futures exchange that we know of. It’s not a broker dealer, according to its ADV. Few see its trades. In sum, it’s a case of radical secretiveness on the honor system.
Lorenz continues: “If you take the time to add up the stated assets from the 33 listed funds in Bridgewater’s ADV, you will tally up $271.3 billion— not the aforementioned $239.3 billion. The difference between the figures could be explained by some double-counting between Bridgewater’s Optimal Portfolio, which mixes Pure Alpha with All Weather. As mentioned above, however, Optimal has $25 billion in AUM, which is less than the $32 billion difference between stated regulatory AUM and the tally from Bridgewater’s funds.
“As you scroll through the 206 pages of part one to Bridgewater’s filing, you might notice other oddities,” Lorenz goes on. “Only two of the 33 funds have relationships with prime brokers: Bridgewater Equity Fund, LLC and Bridgewater Event Risk Fund I, Ltd., in which 99% of the investors are Bridgewater employees.”
Prime brokers perform a variety of helpful hedge-fund services. They act as a central clearing house through which to settle trades (useful for reducing collateral requirements by netting positions). They lend securities to allow a client to sell short. They furnish margin debt. The brokers earn various fees, including those generated by rehypothecating margined portfolios. Longonly funds or unleveraged funds have little need for such accommodation, but Bridgewater’s funds hardly match those descriptors. Pure Alpha strategies go long and short and All Weather famously leverages its bond portfolios.
There are further enigmas. The June 30 13-F report shows U.S. equity holdings of $10.9 billion. The top-16 holdings, worth $9.5 billion, or 87% of the reported total, come wrapped in ETFs, including the Vanguard FTSE Emerging Markets ETF, the SPDR S&P500 ETF Trust and the iShares MSCI Emerging Markets ETF. Beyond the fact that Bridgewater reports holding few U.S. equities, you wonder why such a sophisticated shop would stoop to such a retail stratagem. Surely the Bridgewater brain trust could replicate the ETFs at a fraction of the cost that the Street charges.
. . .
“Bridgewater,” again to quote the informative/uninformative Domenici affidavit, “is a privately owned company and takes extraordinary measures to protect the confidentiality of information such as that which is included in the requested documents. Not only is the information kept confidential with respect to the public at large, it is not even openly disseminated within Bridgewater. In point of fact, even most of the shareholders of our ultimate parent company do not receive copies of our financial statements.”
Who, then, owns Bridgewater? The ADV report lists five Dalio family trusts, each holding at least 25% but less than 50% of Bridgewater, something that seems mathematically difficult. Two entities—Bridgewater Associates Intermediate Holdings, L.P. and Bridgewater Associates Holdings, Inc.—are each noted as holding 75% or more of Bridgewater.
There is a footnote. Please concentrate: “Bridgewater Associates, L.P. (‘Bridgewater’) is a Delaware limited partnership. It has one general partner, Bridgewater Associates Intermediate Holdings, L.P. (‘Intermediate’), a Delaware limited partnership, and two Limited Partners, Intermediate and TrustCo, LLC (‘TrustCo’), a Delaware limited liability company. TrustCo holds a minority limited partnership interest in Bridgewater. Intermediate is the sole member of TrustCo, and owns a majority interest in Bridgewater. Bridgewater Associates Holdings, Inc., (‘Holdings’) a Delaware Corporation,is the sole General Partner and majority owner of Intermediate, and therefore the indirect majority owner of Bridgewater, as noted in Schedule B. Raymond Dalio has voting control of Holdings. For purposes of determining the ownership code in Schedule B, the ownership interests of the Dalio Grandchildren’s Trust and the Dalio Family Trusts have been aggregated.”
The question of ownership varies by the source who reports it. In a July 25, 2011 New Yorker essay, John Cassidy related that Bridgewater employees purchased a one-fifth share in the company from Dalio in a 2010 transaction financed by “several of the firm’s longtime clients.” Assuming approximately the same terms as TRS did in 2012, the investors may have had to borrow $2 billion. Just recently, the Sept. 13, 2017 issue of Hedge Fund Alert reported the sale of Bridgewater “equity stakes totaling 21% of the business to several large institutional investors including Ontario Municipal Employees and Texas Teachers.” If Cassidy and Hedge Fund Alert are correct, the ADV is incomplete, we are confused or the truth is some combination thereof.
Regardless of who owns Bridgewater, an investor must wonder who manages it. A trifling few of the 1,500-member team have anything to do with committing capital. Dalio, in company with an estimated dozen or fewer persons in his so-called circle of trust, invest the client funds, decide about leverage and calibrate risk, although Dalio is surely the first (and by a long shot) within this group of intimates.
Principles is the first of a projected two-volume work on the theory and practice of radical transparency and abrasive truth-telling. The second installment will provoke more controversy and another time-out from the author’s day job. There will be reviews to stew over, angry emails to compose, interviews to be conducted. Since Dalio took to Twitter on April 24, he has tweeted 97 times. He has written 24 blog entries, amounting to a grand total of 22,112 words, on LinkedIn (Harrison Waddill of this staff has counted them). Beyond the April TED talk, Dalio is on the interview circuit. He has addressed reporters at Business Insider, Bloomberg, CIO Magazine, The New York Times and ValueWalk, among others. In January he attended the annual World Economic Forum in Davos, Switzerland. In that pleasant alpine setting, the billionaire worried about the rise of populism.
To credit the thrust of numerous comments from employees on the review website GlassDoor.com, Dalio would be better advised to worry about the fall of technology—his own. There’s a wide range of opinions on Bridgewater, of course. Some bristle under the unique culture. Others love it. One constant complaint is the poor quality of the company’s IT. Thus, from a March 19, 2017 posting: “If you are an engineer or technologist, working here will be negative value added to your learning process. Like taking a step into a parallel dimension where open source never existed and Excel and badly designed homegrown software are the solution to all problems.”
Many are the mysteries and contradictions of the world’s largest hedge fund. We will go out on a limb: Bridgewater is not for the ages.
Reprinted with permission from Zero Hedge.