The Most Successful Hedge Fund Ever

Unless you follow the financial markets and news closely you may not know who Ray Dalio is.  Whatever you may know or not know about Mr. Dalio he simply owns the record now as the most successful hedge fund manager in history measured by net gains.


Pure Alpha hedge fund, part of Dalio’s Bridgewater Associates LP, has earned $35.8 billion for investors since its inception in 1975 and $13.8 billion in 2011 alone.  Bridgewater, based in Westport, Connecticut, has about $120 billion of assets and uses a macro strategy to try to profit from economic trends.


Below is a list of how much money clients have made investing in top hedge funds since inception. The data are provided by LCH Investments NV courtesy of Bloomberg 

Hedge Fund                 Net Gains              Year Founded

Bridgewater Pure Alpha     $35.8 Billion          1975
Quantum Endowment Fund     $31.2 Billion          1973
Paulson & Co.              $22.6 Billion          1994
Baupost                    $16   Billion          1983
Brevan Howard              $15.7 Billion          2003
Appaloosa                  $13.7 Billion          1993
Caxton Global              $13.1 Billion          1983
Moore Capital              $12.7 Billion          1990
Farallon                   $12.2 Billion          1987
SAC                        $12.2 Billion          1992

This Economist article goes a little deeper into the economic ideas of Mr. Dalio

• His economic model “is not very orthodox but gives him a pretty good sense of where the economy is,” says Paul Volcker, a former chairman of America’s Federal Reserve and one of Mr Dalio’s growing number of influential fans. 
• Mr Dalio says his ideas are entirely the product of his own reflections on his life as a trader and his study of economic history. He has read little academic economics (though his work has echoes of Hyman Minsky, an American economist, and of best-selling recent work on downturns by Carmen Reinhart and Kenneth Rogoff) but has conducted in-depth analysis of past periods of economic upheaval, such as the Depression in America, post-war Britain and the hyperinflation of the Weimar Republic. He has even simulated being an investor in markets in those periods by reading daily papers from these eras, receiving data and “trading” as if in real time. 

 

• In the early 1980s Mr Dalio started writing down rules that would guide his investing. He would later amend these rules depending on how well they predicted what actually happened. The process is now computerised, so that combinations of scores of decision-rules are applied to the 100 or so liquid-asset classes in which Bridgewater invests.  
• What Mr Dalio calls the “timeless and universal” core of his economic ideas is set out in a 20-page “Template for Understanding” that he wrote shortly after the collapse of Lehman Brothers in 2008 and recently updated. The document begins: “The economy is like a machine.” This machine may look complex but is, he insists, relatively simple even if it is “not well understood”. Mr Dalio models the macroeconomy from the bottom up, by focusing on the individual transactions that are the machine’s moving parts. Conventional economics does not pay enough attention to the individual components of supply and, above all, demand, he says. To understand demand properly, you must know whether it is funded by the buyers’ own money or by credit from others. 
• Two sorts of credit cycle are at the heart of Mr Dalio’s economic model: the business cycle, which typically lasts five to eight years, and a long-term (“long wave”) debt cycle, which can last 50-70 years. A business cycle usually ends in a recession, because the central bank raises the interest rate, reducing borrowing and demand. The debt cycle ends in deleveraging because there is a “shortage of capable providers of capital and/or a shortage of capable recipients of capital (borrowers and sellers of equity) that cannot be rectified by the central bank changing the cost of money.” Business cycles happen often, they are well understood and policymakers are fairly adept at managing them. A debt cycle tends to come along in a country once in a lifetime, tends to be poorly understood and is often mishandled by policymakers. 
• Mr Dalio admits to being wrong roughly a third of the time; indeed, he attributes a big part of his success to managing the risk of bad calls. And the years ahead are likely to provide a serious test of whether the economic machine is as simple as he says. For now, he is in a more optimistic mood thanks to the European Central Bank’s recent moves, in effect, to print money. Although he still expects debt restructuring in Spain, Portugal, Italy and Ireland, on top of that in Greece, he says that the “risk of chaos has been reduced and we are now calming ourselves down.” Here’s hoping he is right again.