Ray Dalio, the sixty-one-year-old founder of Bridgewater Associates, the world’s biggest hedge fund, is tall and somewhat gaunt, with an expressive, lined face, gray-blue eyes, and longish gray hair that he parts on the left side. When I met him earlier this year at his office, on the outskirts of Westport, Connecticut, he was wearing an open-necked blue shirt, gray corduroy pants, and black leather boots. He looked a bit like an aging member of a British progressive-rock group. After a few pleasantries, he grabbed a thick briefing book and shepherded me into a large conference room, where his firm was holding what he described as its weekly “What’s going on in the world?” meeting.

Ray Dalio has an uncanny ability to anticipate economic trends. Critics say that he runs a cult. Photograph by Platon

Of the fifty or so people present, most were clean-cut men in their twenties or thirties. Dalio sat down near the front of the room. A colleague began describing how the European Central Bank had just bought some Greek bonds from investors at a discount to their face value—a move that the speaker described as a possible precursor to an over-all restructuring of Greece’s vast debts. Dalio interrupted him. He said, “Here’s where you are being imprecise,” and then explained at length what a proper debt restructuring would entail, dismissing the E.C.B.’s move as an exercise in “kicking it down the road.”

Dalio is a “macro” investor, which means that he bets mainly on economic trends, such as changes in exchange rates, inflation, and G.D.P. growth. In search of profitable opportunities, Bridgewater buys and sells more than a hundred different financial instruments around the world—from Japanese bonds to copper futures traded in London to Brazilian currency contracts—which explains why it keeps a close eye on Greece. In 2007, Dalio predicted that the housing-and-lending boom would end badly. Later that year, he warned the Bush Administration that many of the world’s largest banks were on the verge of insolvency. In 2008, a disastrous year for many of Bridgewater’s rivals, the firm’s flagship Pure Alpha fund rose in value by nine and a half per cent after accounting for fees. Last year, the Pure Alpha fund rose forty-five per cent, the highest return of any big hedge fund. This year, it is again doing very well.

The discussion in the conference room moved on to Spain, the United Kingdom, and China, where, during the previous week, the central bank had raised interest rates in an attempt to slow inflation. Dalio said that the Chinese economy was in danger of overheating, and somebody asked how a Chinese slowdown would affect the price of oil and other commodities. Greg Jensen, Bridgewater’s co-chief executive and co-chief investment officer, who is thirty-six, said he thought that even a stuttering China would still grow fast enough to push world commodity prices upward.

Dalio asked for another opinion. From the back of the room, a young man dressed in a black sweatshirt started saying that a Chinese slowdown could have a big effect on global supply and demand. Dalio cut him off: “Are you going to answer me knowledgeably or are you going to give me a guess?” The young man, whom I will call Jack, said he would hazard an educated guess. “Don’t do that,” Dalio said. He went on, “You have a tendency to do this. . . . We’ve talked about this before.” After an awkward silence, Jack tried to defend himself, saying that he thought he had been asked to give his views. Dalio didn’t let up. Eventually, the young employee said that he would go away and do some careful calculations.

After the meeting, Dalio told me that the exchange had been typical for Bridgewater, where he encourages people to challenge one another’s views, regardless of rank, in what he calls a culture of “radical transparency.” Dalio had no qualms about upbraiding a junior employee in front of me and dozens of his colleagues. When confusions arise, he said, it is important to discuss them openly, even if that involves publicly pointing out people’s mistakes—a process he referred to as “getting in synch.” He added, “I believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one’s strengths and weaknesses are.”

Dalio is rich—preposterously rich. Last year alone, he earned between two and three billion dollars, and reached No. 55 on the Forbes 400 list. But what distinguishes him more from other hedge-fund managers is the depth of his economic analysis and the pretensions of his intellectual ambition. He is very keen to be seen as something more than a billionaire trader. Indeed, like his sometime rival George Soros, he appears to aspire to the role of worldly philosopher. In October, 2008, at the height of the financial crisis, he circulated a twenty-page essay immodestly titled “A Template for Understanding What’s Going On,” which said the economy faced not just a common recession but a “deleveraging”—a period in which people cut back on borrowing and rebuild their savings—the impact of which would be felt for a generation. This line of analysis wasn’t unique to Dalio, but almost three years later, with economic growth stagnating again, it does not seem off the mark.

Many hedge-fund managers stay pinned to their computer screens day and night monitoring movements in the markets. Dalio is different. He spends most of his time trying to figure out how economic and financial events fit together in a coherent framework. “Almost everything is like a machine,” he told me one day when he was rambling on, as he often does. “Nature is a machine. The family is a machine. The life cycle is like a machine.” His constant goal, he said, was to understand how the economic machine works. “And then everything else I basically view as just a case at hand. So how does the machine work that you have a financial crisis? How does deleveraging work—what is the nature of that machine? And what is human nature, and how do you raise a community of people to run a business?”

Dalio is serenely convinced that the precepts he relies on in the markets can be applied to other aspects of life, such as career development and management. And he has enough regard for his own views on these subjects to have collected them in print. Before our meeting, he sent me a copy of his “Principles,” a hundred-page text that is required reading for Bridgewater’s new hires. It turned out to be partly a self-help book, partly a management manual, and partly a treatise on the principles of natural selection as they apply to business. “I believe that all successful people operate by principles that help them be successful,” a passage on the second page said. The text was organized into three sections: “5 Steps to Personal Evolution,” “10 Steps to Personal Decision-Making,” and “Management Principles.” The last of the two hundred and seventy-seven management principles was: “Constantly worry about what you are missing. Even if you acknowledge you are a ‘dumb shit’ and are following the principles and are designing around your weaknesses, understand that you might still be missing things. You will be better and be safer this way.”

Dalio’s philosophy has created a workplace that some call creepy. Last year, Dealbreaker, a Wall Street Web site, picked up a copy of the Principles and made fun of a section in which Dalio appeared to compare Bridgewater to a pack of hyenas feeding on a young wildebeest. In March, AR, a magazine that covers hedge funds, quoted a former colleague of Dalio’s saying, “Bridgewater is a cult. It’s isolated, it has a charismatic leader and it has its own dogma.” The authors of the article noted that Dalio’s “emphasis on tearing down an individual’s ego hints at the so-called struggle groups of Maoism,” while his search for “human perfection devoid of emotion resembles the fantasy world in Ayn Rand’s ‘The Fountainhead.’”

Dalio doesn’t pretend that Bridgewater is a typical workplace, but he is sensitive to criticism. The recent media attention irked him, because, in his view, it misrepresented and trivialized Bridgewater’s culture, which he insists is central to the firm’s success. “It is why we made money for our clients during the financial crisis when most others went over the cliff,” he wrote to me in an e-mail. “Our greatest power is that we know that we don’t know and we are open to being wrong and learning.”

After the “What’s going on in the world?” meeting, he walked back to his office, an airy but modest-sized corner space that overlooks the Saugatuck River and is lined with pictures of his wife and four sons. He sat down behind his desk and showed me a book he had been reading—“Einstein’s Mistakes: The Human Failings of Genius,” by Hans C. Ohanian. “Here was the greatest mind of the twentieth century, and he made lots of mistakes,” Dalio said. In his Principles, Dalio declares that acknowledging errors, studying them, and learning from them is the key to success. He writes, “Pain + Reflection = Progress.” Bridgewater puts this equation into action by organizing lengthy assessment sessions, in which employees must discuss their mistakes.

The next item on Dalio’s agenda was a meeting with his two co-chief executives: Jensen and David McCormick, a former senior official in the Treasury Department under George W. Bush. Like virtually all meetings at Bridgewater, this one was taped. Dalio says that the tapes—some audio, some video—provide an objective record of what has been said; they can be used for training purposes, and they allow Bridgewater’s employees to keep up with what is going on at the firm, including his discussions with senior colleagues. “They get to see all of my mistakes,” Dalio told me. “They get to see all of my humanity.”

Once a tape recorder had been switched on, Jensen, McCormick, and Dalio discussed the possible promotion of an internal candidate to a senior-management role. McCormick, a soft-spoken forty-five-year-old who studied engineering at West Point, argued that the candidate’s prior experience at a big Wall Street firm indicated that he could probably do the job. Dalio disagreed. An investment bank is a “totally different world,” he said. But, rather than continue the discussion, he asked one of his assistants to call in the candidate. One rule of radical transparency is that Bridgewater employees refrain from saying behind a person’s back anything that they wouldn’t say to his face.

The man arrived and stood before Dalio’s desk. Dalio explained what the discussion was about and said, “I don’t imagine that you would be a good fit for the job.” The man took a seat, and Dalio and McCormick continued their discussion about his qualifications. The candidate explained his experience on Wall Street and said he thought he could do the job well. Dalio leaned back in his chair, looking skeptical. The employee didn’t get the promotion.

The only child of Italian-American parents, Ray Dalio was born in Jackson Heights, Queens, in 1949. His father was a jazz musician who played the clarinet and saxophone at Manhattan jazz clubs such as the Copacabana; his mother was a homemaker. When Dalio was eight, the family bought a three-bedroom house in Manhasset, and enrolled Ray in the local public school. “I was a bad student,” he recalls. “I have a bad rote memory, and I didn’t like studying.” From the age of twelve, Dalio caddied at the nearby Links Golf Club, whose members included many Wall Street investors. Some of them gave Dalio tips. The first stock he purchased was Northeastern Airlines, which soon received a takeover offer. Its shares tripled. “I figured that this was an easy game,” Dalio said. By the time he started college, at a nearby campus of Long Island University, he had built up a stock portfolio worth several thousand dollars.

“Do you mind listening to ‘Eine Kleine Holdmusik’?” Facebook

Twitter

Email

Shopping

After signing up for some finance classes, he discovered that there were some topics he enjoyed studying. Transcendental meditation, which he took up following a trip to India by the Beatles, also helped his work habits. Most mornings before going to the office, he still meditates. Demonstrating his technique, he sat back in his office chair, closed his eyes, and clasped his hands in front of him. “It’s just a mental exercise in which you are clearing your mind,” he said. “Creativity comes from open-mindedness and centeredness—seeing things in a nonemotionally charged way.”

After graduating, Dalio went to Harvard Business School, where he traded commodities—grains, oil, cotton, and so on—for his own account. Not long after leaving Harvard, he landed at Shearson Hayden Stone, the brokerage firm run by Sanford Weill. Dalio worked in the commodity-futures department, advising cattle ranchers, grain producers, and others on how to hedge risks. (The horns of a longhorn steer, the gift of some California ranchers, are mounted behind his desk.) On New Year’s Eve in 1974, Dalio went out drinking with his departmental boss, got into a disagreement, and slugged him. About the same time, at the annual convention of the California Food & Grain Growers’ Association, he paid an exotic dancer to drop her cloak in front of the crowd. After being fired, he persuaded some of his clients to hire him as a consultant and founded Bridgewater, operating it out of his two-bedroom apartment. He was twenty-six years old.

By the early nineteen-eighties, Dalio had got married, started a family, and moved to Wilton, Connecticut, where he lived and traded out of a converted barn. He also advised businesses on how to manage risk and published an economic newsletter. One of his readers was Bob Prince, a young financial analyst who worked for a bank in Oklahoma, and who is now Bridgewater’s co-chief investment officer. Prince showed one of Dalio’s articles to his boss, David Moffett, who went on to become the chief executive of Freddie Mac. “He said it was the best thing he had ever read on how the economy works,” Prince recalled. Another of Dalio’s articles that stuck in Prince’s memory was titled “What Is a Jeweler?” It described a jeweller as basically an investor with a long position in gold and precious stones. If the market price of these commodities goes up, the jeweller makes money on his stock. If prices fall, he can lose out. To limit the risk, Dalio wrote that jewellers should purchase gold-futures contracts designed to rise in value when the price of gold falls.

In 1985, Dalio persuaded the World Bank’s employee-retirement fund to let Bridgewater manage some of its capital. In 1989, Kodak’s retirement system did the same. At the time, Kodak had most of its money invested in stocks. Dalio’s pitch, which hasn’t changed much over the years, was that by investing in a variety of other markets, such as U.S. and international bonds, and using leverage to bolster its exposure, Bridgewater could match or beat the stock market with less risk. “He had a new way of thinking,” Rusty Olson, who ran Kodak’s retirement funds for many years, told me. “You get the same return, but you get a heck of a lot of beneficial diversification, too.”

Hedge funds date to 1949, when Alfred Winslow Jones, a writer at Fortune, opened a private investment firm using sixty thousand dollars he had raised from friends and forty thousand he had saved. To boost his returns, Jones borrowed heavily and bought stocks he liked “on margin”—a practice that had been discredited in the late nineteen-twenties. As a “hedge” against the market falling, Jones also picked out some stocks he believed to be overvalued and bet against them—a practice known as “selling short.” Jones’s fund regularly beat the Dow, and by the late nineteen-sixties it had attracted many imitators.

Worldwide, there are now some ten thousand hedge funds, which the government regulates only loosely. Together, they have about two trillion dollars under management. Even today, they employ the two basic tools that Jones used—borrowing (“leverage”) and selling short—and they charge their clients hefty fees, as Jones did. On top of a two-per-cent management fee, they deduct twenty per cent of any investment gains they generate. Jones claimed that this remuneration scheme, which is known as “two and twenty,” was inspired by the way ancient Phoenician merchants financed their trading expeditions. But the practice is also tax-driven. It allows hedge-fund managers to classify much of their income as capital gains, which are taxed at a far lower rate than regular income. While cops and schoolteachers face a marginal tax rate of twenty-five per cent, hedge-fund managers like Dalio have for years paid fifteen per cent on the lion’s share of their income.

Some hedge-fund managers, such as Steven A. Cohen, of S.A.C. Capital, and David Einhorn, of Greenlight Capital, are stock pickers, like Jones. Others, such as James Simons, of Renaissance Technologies, are known as “quants.” They use computers to sift through market data, spot profitable opportunities, and place trades, all with minimal human intervention. As a macro trader, Dalio is working in the tradition of George Soros and Julian Robertson, famous speculators who ranged across markets.