Bridgewater Associates: Modeling Ray Dalio’s Modeling

Image Credit: Brad Trent / The Times

Treat your life like a game.” – Ray Dalio

Before we get to the overview of our recent modeling of famed hedge fund leader, Bridgewater Associates and its founder, Ray Dalio, we need to set the stage for why this particular profiling is so important. It starts with what we have been calling personal alpha

Personal Alpha

Ray Dalio is a singular phenomenon in the modern financial world. For starters, he’s performed the feat of building the world’s largest hedge fund (with $160 billion AUM as of latest count) and delivering “stellar gains” in its flagship Pure Alpha fund of 14.6% for 2018 while most others struggled. In Alphacution’s asset management ecosystem map, Bridgewater defines the boundary between active and passive management zones due its role as the largest hedge fund.

But more than stretching AUM boundaries and strong performance, Ray Dalio is a singular phenomenon because he has built an amazing business culture, and has recently set out to share his wisdom on how to build what he calls an idea meritocracy – the kind of company where the best ideas win.

Now, in a business known for its legendary BSDs, someone is always packing – or, boasting about packing – the biggest version of something. But, as far as I can tell, after spiking the proverbial football on an 10- or 11-digit fortune, how many of them have gone out to share the mechanics of their personal philosophy like Ray Dalio has? BSDs tend to enjoy throwing their money around, philanthropically, but rarely their wisdom…

Writing books, showing up to speak in front of cameras (as if there was more than one of him), each day my LinkedIn page now somehow begins with a message like the following from Ray:

On his website, the mission greets you right out of the gate: “Bridgewater Associates is focused on understanding how the world works.” – an incredibly lofty if not suspicious goal.  (Is that all?!) And then, when you find terms like radical transparency peppered throughout his TED talks and interviews, you realize he’s not kidding…

Sure, Mr. Dalio is regularly called upon for his market views (some of which are worrisome), but in parallel with all that, he is actively promoting his views on organizational development and personal transformation.

Funny, that. In recent posts, I begin to introduce the idea that market alpha is finite, but that personal alpha is not… You can be whatever you set your mind to be; a concept that may prove too soft and squishy for some traditional Wall Streeters, but one that will prove valuable to many of those who have been / will be disrupted by the ongoing automation (and skills mix shifts) of global financial markets.

As evidence, an emerging and highly experimental section of our YouTube channel, Alphacution Riffs, is called Personal Alpha Project. One of Ray’s videos has already been posted there. This is not a launch announcement; just a seed marker for a broader audience down the road – and to underscore the fact that we are simpatico with what Mr. Dalio is trying to promote. The world might be a better place to live if the best ideas were elevated more consistently…

Market Alpha

Returning to market alpha and Bridgewater’s mission to understand how the world works: Alphacution believes that how the world works is not only changing rapidly, it is also increasingly interconnected with how markets work. Furthermore, and perhaps more importantly, Alphacution believes that this is the component of most managers’ research efforts that is either entirely missing or woefully underdeveloped.

Increasingly, managers not only need to pay attention to their picks, they also need to pay closer attention to their neighbors. Performance – and especially, outperformance – does not fall from the tree of infinite abundance. Alpha is finite. Chances are – right now – one of your “neighbors” is working hard to steal some of your market alpha…

So, as an important reminder, while we spend a lot of time detailing the exploits and compositions of those who operate closest to the sources of liquidity – namely, market makers, prop shops and the like – we are simultaneously trying to foreshadow what is heading towards those who operate further away from those sources of liquidity – namely, most hedge funds and all traditional asset managers.

Beyond AUM, performance and legendary leadership, Bridgewater is an important player in the ecosystem for what it appears to have achieved with technology. Technology adoption is also a singular phenomenon. It’s the variable that connects players, strategies and markets (i.e. – sources of liquidity for various securities).

Alphacution’s working hypothesis is that quantitative and automated methods are becoming increasingly pervasive in financial markets. Bridgewater is symbolic of the outer boundaries of this evolution. Few managers to date have applied so much automation – in this case, in the realm of data management for factor analysis, portfolio construction and signal development – to so much money before.

But, when we look into the composition of that piece of Bridgewater’s portfolio that is captured in quarterly 13F filings – namely, long positions in US stocks, ETFs, options and certain other listed securities – it’s almost as if we need to push pause on the significant cloud of mythology in order to retrain our minds to absorb some facts: In the chart below, Alphacution presents what is essentially the US listed long component of Bridgewater’s portfolio value for the 52 quarters beginning Q4 2005 and ending with the most recent periodic report, Q3 2018. (We have purposely left the dollar figures to the side for the time being to perform an initial cursory review of the findings.)

Now, it’s difficult to miss the role that ETFs have played in the value of this piece of the portfolio since about 2010. It’s also difficult to miss the fact that aggregate single stock exposure has been intentionally limited to a certain dollar level since late 2011; an impressive period of about 28 quarters. This is likely some kind of a liquidity constraint for US equity markets.

But then, when we look at the position counts behind these aggregate exposures, the interpretations become significantly more puzzling – or, fascinating – depending on your perspective. In the chart below, Alphacution presents the 13F position segmentation broken down by security type, which for Bridgewater, is only stocks and ETFs. Over 52 quarters, there were no listed option positions nor less-vanilla structures (like convertible preferred shares, warrants, rights or notes). Just stocks and ETFs.

So, when we add our findings from the first and second charts to present the third chart below, we see that a short list of ETFs (<10 up to Q2 2017) has been commanding a majority of the portfolio value (and absorbing growth in AUM) for the past 32 quarters. Moreover, since Q4 2011, the average allocation of this piece of the overall portfolio to ETFs has been 84.4%, thereby leaving aggregate long single stock exposure averaging ~16% of value.

The core feature (and benefit) of high-turnover strategies – or other strategies with limited delta exposures – is the fact that you don’t need to care about the fundamentals of the underlying securities. It’s all about liquidity, market structure, volatility, mechanics. As your strategy holding period becomes longer and longer (i.e. – turnover frequency goes down) then you need to care increasingly about the fundamentals. And with fundamentals, this becomes a diverse data sourcing, management and computation challenge – because primary, secondary and tertiary fundamental catalysts can come from numerous sources.

More so in order to get the timing right. At its size, Bridgewater needs to move a ton of money around with impeccable timing. Highly liquid ETFs – which we have detailed here as the growth story in US listed markets – have become the best means by which to move a ton of money around, and to do so cheaply.

The challenge for Bridgewater – as Alphacution will continue to detail in upcoming profiles of various managers, strategies, segments and phenomena within the global markets landscape – is that ETFs may have become a little too popular for their own good. Up and down the strategy spectrum, ETFs have invaded all portfolios to a degree that most may not realize.

In early 2019, keep an eye on announcements for AUM levels among the likes of Bridgewater. They understand the capacity of their strategy. With strong outlier performance in 2018 – and the growing mythology of their infallibility – Ray Dalio will be sitting in the enviable seat where he can accept as much new money as he wants. Pay attention to that number when it comes out…

We’ll stop here for now – and look forward to sharing more as it’s developed…

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By | 2019-02-12T15:34:38-05:00 January 23rd, 2019|Alphacution Feed|

About the Author:

Paul Rowady is the Director of Research for Alphacution Research Conservatory, a research and strategic advisory platform uniquely focused on modeling and benchmarking the impacts of technology on global financial markets and the businesses of trading, asset management and banking. He is a 30-year veteran of the proprietary, quantitative and derivatives trading arenas. Contact:; Follow: @alphacution.