The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja

institutional client to use All Weather. And in 2004, recognizing the need for the asset management industry to adopt the principles of separating alpha and beta, Dalio published a piece entitled “Engineering Targeted Returns and Risks,” which would show investors how to use the concepts he had used for many years in Pure Alpha and All Weather. Dalio called it “Post-Modern Portfolio Theory (PMPT)” because it built on the concepts of portfolio theory, but went a few steps beyond.
     
    Regarding All Weather, Dalio wrote, “I believe that, as this approach is increasingly adopted, it will have a radical beneficial impact on asset allocation that will be of a similar magnitude to that of traditional portfolio theory as it gained acceptance.” Indeed, following the stress test of the 2008 financial crisis when most investor portfolios were down 40 percent into the stock market bottom, an All Weather portfolio was down less than 10 percent. Over its lifetime, it has outperformed the conventional 60/40 stock/bond asset allocation with only half the risk.
     
    Seeing the potential for such a strategy, other money managers quickly sought to replicate the passive All Weather approach, and the industry adopted the name “Risk Parity” for such approaches. Over the past five years, managers such as AQR, First Quadrant, Invesco, Putnam, and Wellington began offering Risk Parity products modeled after All Weather. And in 2011, a survey of institutional investors showed that 85 percent were familiar with the approach and 50 percent were using or considering using the concepts in their own portfolios.
     
    So, as a funding crisis looms for global pension funds and the adoption of Risk Parity accelerates, Dalio’s greatest impact on the investment industry is likely his invention of All Weather.
     
    Fund in Focus
     
    The founder of the world’s largest hedge fund is not its ruler but rather the reigning mentor. Greg Jensen, Eileen Murray, and David McCormick, the former undersecretary of the Treasury Department, are Bridgewater’s co-CEOs. Dalio had been the fourth co-CEO, but stepped down in July 2011 to take an advisory role. Though his vision, principles, and process emanate from every noteworthy decision the firm makes, he is adamant about the division of power between the executives. In addition to co-CEOs, the firm has co-chief investment officers in Bob Prince, Jensen, and Dalio. Bridgewater’s success goes beyond just Dalio, he says.
     
    The firm’s funds are divided into Pure Alpha, the flagship hedge fund with $60 billion as of December 31, 2011; the $45 billion All Weather Risk Parity strategy; a portfolio of equally balanced assets that perform well in environments of rising growth (e.g., equities), falling growth (e.g., nominal bonds), and rising and falling inflation and the fund’s $15 billion Pure Alpha Major Markets fund, which launched with more than $10 billion in 2010, giving investors the option to reinvest their gains from that fund into a new vehicle. The firm’s flagship fund has lost money in only one year and only had a negative net of fees return in three years since its founding and boasts an average annualized return of 18 percent since 1991.
     
    Though the funds are divided in a clear manner, Bridgewater’s structure is quite complex. The journey is the process at Bridgewater, and it often takes a good deal of back-and-forth before decisions are finalized. Perhaps even more importantly, a high degree of personal reflection is required throughout the process. As Dalio continues to build Bridgewater into a thriving organization, attracting the world’s most powerful clients, he is hit with a profound observation: the separation of alpha from beta, now a strategy synonymous with the hedge fund industry, was born at Bridgewater in 1990. The fund was also the first currency overlay manager and originated the idea of the popular Risk Parity strategy over 15 years ago. “From a business point of