Sunday, March 22, 2009

Bridgewater's Ray Dalio

The article by Fortune on Bridgewater and Ray Dalio is a must read. Does a great job describing the culture of Bridgewater which is I how I think any hedge fund should be run. Also discusses the D-process which Ray Dalio describes as an economic downturn as a result of deleverging instead of the normal business cycle semi controlled by the FED. As a result he is still very bearish. Thanks goes to Pete.

Out of those four historical examples, Dalio says that our current situation most closely resembles the Great Depression because of the global breadth of the problems. But he doesn't like to use the term "depression." He thinks it's too scary, evoking as it does images of hobos and Hoovervilles, and distracts people from focusing on the mechanics of what is going on. He prefers to use a term he coined: "D-process."

Most people, says Dalio, think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both.

This is the money paragraph and what I think hits to the heart of defining Bridgewater's success. This intellectual humility / honesty is very very very rare in the hedge fund world. I hate when people ask me what I think is going to happen or my view on x. No one knows. It is a probability and almost nothing is a 100% probability.

He says he is perfectly comfortable having his assertions challenged at all times. In fact, he craves it. "I draw my conclusions," he says, "and I say, 'Please shoot holes in this. Tell me where I'm wrong.' People tend to think that my success, or whatever you want to call it, has been because I'm a really good decision-maker. I think it is actually because I'm less confident in making decisions. So in other words, I never know anything really. Everything is a probability."

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