Bridgewater’s new boss

0:05Pushkin. The largest hedge fund in the world, Bridgewater Associates, has a new boss. Does it matter? This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm Rob Armstrong, coming to you from Unhedged World headquarters in New York City. I am joined down the line from London by the indefatigable bank editor, Hortensa Aliye. Aliye. Hortensa Aliye. How was that last one? That was perfect. Okay. Hortensa, welcome to the show. Thank you for having me again, even though I've moved country. Just as a way to kick things off for our listeners, what is Bridgewater? Who is Ray Dalio?

0:57Who's near Bardea? Get us caught up. Okay. So Bridgewater, world's largest hedge fund based in Connecticut. It's about to celebrate its 50th year. Nothing we would know about Rob. Yes. And. Reputed to be something of a cult, but has made a lot of money. How's that? Exactly. And Ray Dalio is the founder of Bridgewater. He started it 50 years ago and has a reputation for being a mercurial person. Yes. Who loves Burning Man and recently attended a Taylor Swift concert in Singapore in which he seemed to endorse her for maybe president. Outstanding. Oh, I'm near Bardea. Oh, wait, no, no. I've got a question.

1:46Is it true that you've been on Ray Dalio's submarine? I haven't. Oh, that's very disappointing. Do you want someone else for the show? Yes. The show's over. Thank you for coming, listeners. Your next guest will be someone who's been on Ray Dalio's submarine.

2:05Near Bardea. I bet he has. Yeah, that's fake news. I don't know if that's true. Okay. But Nir Bardea is the new CEO of Bridgewater. He was installed in the job a year ago. So it's been a year since he came on board and he's embarked on this quote unquote overhaul of the world's largest hedge fund. How was that? That is perfect. And he used this kind of Dr. Frankenstein metaphor of replacing the organs of the old Bridgewater and placing them into a new, better body. And he kind of screamed, it's alive recently in the pages of the FT. Am I getting that right? Right. It's 80 percent there. This actually reminds me, Matt Levine had a great bit on the story after we wrote it.

2:57He talks, you know, about how there's a strange quote where he says everything has to get rewired. It's like taking a brain and a heart out of a human and then planting a new brain and a new heart, which is slightly graphic. and Matt Levine writes, okay, the management committee at D.E. Shaw, another hedge fund for our listeners, never went around being like, we had to murder David Shaw and remove his heart, but Bridgewater is an unusual place even now. And I think that sums it up. Very good. Tell us a bit more about the new CEO, Nir Bardea. Yeah, so Nir Bardea joined the fund in 2015. He had previously never really worked in finance.

3:38He was an ex-military officer, and he had served as an advisor to the Israeli mission to the United Nations during the 2014 General Assembly. So his background is very much not finance related. This is a remarkable story in a way. So one day you're like, you know, marching around in the desert or what have you, and then you're doing diplomatic things. And 10 years later, you're running the largest hedge fund in the world. This is an amazing, how does one accomplish a transformation like this, asking for a friend? Yeah, it is. It is remarkable. It has been highlighted by a lot of people that he's had this kind of staggering ascent.

4:23And that then brings up the question, well, is he truly leading Bridgewater or is he the face of Bridgewater whilst the strings are being pulled by other people? Okay, we'll get to that question. But before we can establish what this guy is doing in his job, let's talk a little bit about what Bridgewater actually does. How have they made the money in the past? How are they going to make it now? So Bridgewater has two main funds. Its flagship fund is called Pure Alpha and it has its all weather fund, which is a risk parity fund. And we'll get to explaining that. Pure Alpha is pretty large. It has, I think, about$80 billion in assets at the moment.

5:08And really, Bridgewater is known as a macro fund for the uninitiated. That basically means it trades on macroeconomic events. So you're really trying to predict the future. I'm going to take the part of the Bridgewater haters out there now, and you can respond maybe to say why the haters are wrong. So here's what the haters say. So 50 years ago, Ray Dalio has this idea called risk parity, which means you have a basket of assets. Let's say it's mostly equities and treasuries. And you design the portfolio so there's an equal amount of risk in both baskets. In effect, what that means is you put a lot of leverage on the treasury so they become just as risky as the equities.

5:54You have a balanced amount of risk in each part of the portfolio. In effect, that means you have these very levered treasuries. Am I getting this broadly right? Yes, yes. You're hired. You can now run Bridgewater.

6:09Man, I wish. Yes. So effectively, the assets are weighted according to how much market volatility they produce. Well, what happens next? A massive multi-decade bull market in U.S. treasuries. So the haters say rather than looking sagely into the future and seeing what is going to happen, Ray Dalio is just some guy who, starting in the early 80s, owned a ton of treasuries with a ton of leverage. And that turned out to be a very good idea. Yes. I'll go in defense of Ray Dalio. Give us the other side. All right. First of all, just executing that trade or learning how to do that trade is an impressive thing.

6:56and being a pioneer in it. Yes. But also he did take that and he built a hedge fund that pretty consistently for almost four decades, I say four decades because it's had a bit of a ropey period over the past five or six years. Yes. Produced really consistent returns to the point where it became the most successful hedge fund in the world in terms of performance. Got it. The top spot has now been taken by Ken Griffin and Cirodel. But this was a massively successful, massively successful enterprise. Yes, exactly. And so to keep that going for such a long period of time is impressive, whether it's by luck or by design.

7:41And then what's happened, of course, is that in the last five or six years, performance has really fallen off. And Bridgewater has had these very, very steep drawdowns, or as we normal people call them, it's lost money. Meaning money, does that mean they've lost money, money has walked out the door, investors have left, or their performance has been negative? Performance, yeah. Yeah, has been negative. And do we have a diagnosis of what's going on that's hurting the performance? Well, I think it's because the heart and the brain have been taken out of the human body. No, I'm joking. I mean, there is a sense it became too cumbersome in some way.

8:26Yes. Right? Yes. I think a lot of people point to the size of it. Size is sort of the enemy of the hedge fund. And what happens is that you have this great strategy. You lever these treasuries up. You become very successful and everyone wants to put their money in. And what a lot of hedge funds will do now is they'll say, we've had enough money. And yes, these rich people do say that. And you cap the hedge fund and you say, we're not accepting new investors for X period of time because you don't want to get to the point where you can no longer trade in markets as quickly as you need to. The recently deceased and much esteemed Jim Simons at Renaissance Technologies.

9:03This was exactly what he did. He closed the fund when it started to get so big. He couldn't complete the strategies he wanted to pursue. And Bridgewater never did that. Exactly. So Bridgewater kept growing. And at its peak, it was managing about$160 billion. And, you know, ad leverage, you're looking at a very, very, very big operation. And so what I think what people and investors felt had happened was it just wasn't nimble enough. Even when it was predicting these big macroeconomic events, it just couldn't move as swiftly as it once had done. And so what the new CEO has done, our guy Nir, is he said, I'm actually going to cap assets in the Pure Alpha, the flagship fund.

9:50I'm going to return some money to investors. And look, this is no longer about us being the biggest hedge fund in the world. It's about us being the best performing hedge fund in the world. And that's what we need to focus on. Speaking of performance, there is still an old guard at Bridgewater of basically portfolio managers who've been there a long time. My sense is that near is there kind of executing business objectives or strategic objectives and the money is still being run by the sort of team of portfolio managers. Is that is that your sense as well? Yeah, I think that's fair. The way that they see themselves now is sort of Bridgewater has been split into two.

10:35So you've got the alpha generation engine. And again, for us normal mortals, that just means the making money engine, which is the hedge funds. And you've got the sort of client, what they call client solutions part. But that to me is a slight enigma. And I've sort of gone back and forth with them many times trying to understand what exactly the client solutions bit does. But at the most basic form, it works with Bridgewater clients to try and find ways to enhance performance. How that happens, what the magic is, we don't really know. And the hedge fund solution is the very obvious part, which means it has the two funds we talked about and other smaller funds.

11:19and those sort of two operations are run by the co-CIOs. And the co-CIOs are Karen, Karen Yol Tambur, whose name I have properly butchered. I thought you did a great job. And Bob Prince and Greg Jensen. And they've been there and those three have been there. I know those names. They've been there for what, with the exception of Karen, whose last name I won't even try to pronounce. They've been there for quite a while. Yeah, they've been there for decades. And they know the fund well. And so they're running the money engine and Nir is on the operational side. Okay, but this leads us to the biggest and most important question, which is whether the great magician, prognosticator, sage, and genius Ray Dalio is still behind the curtain orchestrating what is going on here, pulling the strings.

12:18Choose your metaphor. This guy has said that he's left before and not left. Is Ray Dalio still running this thing? The difficulty has always been that Ray has been behind the scenes and has very much been a part of determining how the fund invests. It seems at least this time that he has certainly taken a step back, is allowing these three co-CIOs, two of whom he's obviously worked very closely with for a very long time to run the show. And Nir was part of Ray's team and Ray hired him and promoted him. So he's got these people there that he's known for a very long time. Now, there definitely seems to be this desire from Bridgewater and let's say the sort of the new generation of Bridgewater to have some distance from Ray and to make it that this is no longer Bridgewater as you know it, this is Bridgewater 2.0.

13:18And so I think having seen what happened to the other CEOs, Nearby Day very much wants to make it that I am now in charge and I work with these three people to run the show. Ray certainly has a position within Bridgewater, but he's not doing anything to do with our investment processes, etc. A lot of the money is his money, right? Some large percentage of the assets must be his. They are. But he's also, you know, he's doing his retirement thing. He's exploring the deep blue oceans in his submarine. Yes. He has a family office in Singapore. He sometimes talks to the FT about his economic views.

13:57And so he is still very much around. But here's the thing, Urtensa. I'm just going to fearlessly predict something, and you can try to convince me otherwise. But, you know, they have a couple of years of more bad results. He's going to bring that submarine to the surface and start raising some hell, don't you think? I mean, this is I mean, you know, people who have immense power and money like to keep having immense power and money and exercise their their initiative. I just don't see it. Yes. And we're purely obviously giving our own views here. But yeah, I don't envision that if Bridgewater loses money that he'll step away.

14:33No. I think that's been really important, actually, because I think it's up about 20 % for the first four months of this year. And that has been the pattern, weirdly, for the past couple of years. It's been on this huge tear at the start of the year. And then something seems to happen and it loses the money it's made in the first half or first nine months. and then it ends up having much lower performance. So it'll be interesting to see, especially since this is sort of the first year, I guess, that Nier is in charge by himself, how performance does. Because, yeah, you bet your bottom dollar, God, that's a phrase I haven't used for a long time, but you bet your bottom dollar that if they do lose money, I don't think Ray will be on the sidelines.

15:19We have to go to the sidelines for just a minute, But when we get back, we'll have long and short.

15:34Listeners, welcome back. This is long short. That part of the show in which we go long things that we like and short things that we do not like. Hortensa, do you have a long or a short for us? I have a short. Go ahead. It's devastating. um i am short bennifer say it ain't so you i you just give me the 10 second update on what bennifer have been up to we're talking of course about ben affleck and jennifer lopez jennifer lopez okay and their second chance at love yes each other they've both had several other chances with other people. This is like, collectively, this is like their 17th chance. Yes, I think put together, this is like their 14th engagement.

16:22Yes, right. But yeah, the rumor on the street is that Jenny from the block and Ben Affleck are on the rocks. Oh no. Which is devastating. It is devastating. And you believe the rumors. You're short their relationship. So you believe what the streets are saying. You've got to get ahead. I think the best way to deal with pain is that you've got to pretend it's already happened. And then your body sort of and mind acclimatizes to it. Yeah, we all had a lot. We all had a lot riding on that relationship. I think you can agree. All right, well, on a more prosaic note, I'm long Walmart. You know, they had the results this morning, some puts and some takes, but, you know, there was a moment there where we were like, oh, Walmart, it's the company of the past, Amazon, everything is going to be delivered.

17:08but man, this business just keeps churning along. As it turns out, Americans like to drive to an enormous box and buy cheap stuff. And I am long about continuing to happen. The stock's a little expensive, but man, I like that business. So I'm going to get over my heartbreak about Bennifer by going buying some cheap stuff, maybe a flat screen TV and a huge bag of potatoes at Walmart after we stop recording today. Well, I think you'd better go to Dunkin' Donuts and supporting Ben Affleck. Oh, good point. Good point. That's a long for a separate show. Portensa, it's been great having you. Thanks for coming on the show.

17:50We'll have you on again soon. Thanks for having me. Listeners, we'll be back in your feed on Tuesday. Until then, stay sharp. Unhedged is produced by Jake Harper and edited by Brian Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

18:34We'll be right back.