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How Does the World’s Largest Hedge Fund Really Make Its Money? (Part II)

Ray Dalio’s investing tactics have always been a closely kept secret, even inside Bridgewater Associates. Several years ago, some of Wall Street’s biggest names set out to discover his edge.

How Does the World’s Largest Hedge Fund Really Make Its Money?

Trading Game

The bottom line: Mr. Dalio was Bridgewater and Mr. Dalio decided Bridgewater’s investments. True, there was the so-called Circle of Trust. But though more than one person may have weighed in, functionally only one investment opinion mattered at the firm’s flagship fund, employees said. There was no grand system, no artificial intelligence of any substance, no holy grail. There was just Mr. Dalio, in person, over the phone, from his yacht, or for a few weeks many summers from his villa in Spain, calling the shots.

Lawyers for Mr. Dalio and Bridgewater said the hedge fund “is not a place where one man rules because the system makes the decision 98 percent of the time.” They said that “the notion that Mr. Dalio ‘call[ed] the shots’ on Bridgewater’s investments is false.”

Mr. Dalio largely oversaw Pure Alpha, the main fund, with a series of if-then rules. If one thing happened, then another would follow. For Pure Alpha, one such if-then rule was that if interest rates declined in a country, then the currency of that country would depreciate, so Pure Alpha would bet against the currencies of countries with falling interest rates.

Many of the rules dealt simply with trends. They suggested that short-term moves were likely to be indicative of long-term ones and dictated following the momentum in various markets.

Bridgewater’s rules gave it an unquestionable edge in the wildly successful early days, in the late 1980s and 1990s, when most people on Wall Street, from junior traders to billionaires, still believed in the value of their intuition.

As the years passed, however, Mr. Dalio’s advantage softened, then seemingly ceased by the 2010s and into this decade. The rise of powerful computers made it easy for any trader to program rules and to trade by them. Rivals quickly matched Mr. Dalio’s discoveries, then blew past them into areas such as high-frequency trading. Mr. Dalio stuck to his historic rules. (“They are timeless and universal,” he told one interviewer.)

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