WHEN Ray Dalio finally gave up the reins of Bridgewater Associates 18 months ago, he ceded control of the world’s biggest hedge fund to a younger generation. He also left behind a firm confronting restless investors after years of lacklustre returns.
Chief executive officer Nir Bar Dea needed to revive a flagship hedge fund that was once the industry’s most profitable, but has since lagged rivals. That meant shrinking the fund, cutting costs, firing long-time veterans, promoting other employees and revamping a culture that – depending on who was describing it – was either the firm’s great strength or a glaring weakness.
Bar Dea embarked on that effort in his first year as sole CEO, with a major management shakeup. He has taken steps to dial back some of the more unusual aspects of the firm – including nixing so-called baseball cards created by employees rating each other on their strengths and weaknesses. Many executives within the firm applaud the changes, which they say were long overdue.
After notching one of its worst annual declines since its 1991 start last year, Bridgewater’s flagship Pure Alpha fund has rebounded almost 16 per cent this year, said sources.
Yet the turnaround has been tumultuous. Some investors, who asked not to be named discussing private deliberations, say they have been frustrated by lacklustre returns going back years – including 2023’s loss – and are considering exiting the fund if performance falters again. They say they are frustrated after a leadership transition that took a decade longer than expected, including seven individuals holding the CEO title.
Hedge funds across the industry are grappling with life after their founders move on, including how closely to stick to the approaches that drove the firms’ success. That challenge is especially stark with Bridgewater and Dalio, whose personality stands out even in an industry rife with outsized egos. The 74-year-old billionaire is known for espousing “principles” for life and work, both in lengthy LinkedIn posts and a bestselling book, and for preaching a harsh management philosophy known as “radical transparency”.
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Bridgewater declined to comment on its transition and performance. The details on the restructuring over the past four years are based on interviews with 10 people familiar with the firm.
The flagship Pure Alpha fund – known as Pure Alpha II – lost more than 4 per cent in the past four years, while its peers, as measured by PivotalPath’s global macro index, climbed almost 24 per cent.
Some of its competitors marked double-digit gains last year, when Bridgewater’s Pure Alpha declined 7.6 per cent. The fund’s performance in equities dragged down returns, said sources familiar with the firm. Investors have complained about a string of bad stock market calls.
The firm’s transition dates back to August 2020, before Bar Dea became CEO, and after losses early in the global pandemic added to years of underperformance. Senior management, including Bar Dea, had pushed to form an investment committee to oversee decisions, and Dalio moved to a mentor role, in which he no longer had a say over the portfolio.
While the fund has posted brief periods of strong performance since then – including this year’s gains – the returns have been volatile.
In 2022 and 2023, Pure Alpha notched strong gains, only to reduce or erase them by December of each year. The year 2022 would have been one of Bridgewater’s best annual performances if it not for a two-month rout at year-end. This year, the fund jumped 15.8 per cent through Mar 26, trouncing an index of macro funds.
But Bridgewater still needs to prove to its investors that it can sustain that performance – or at least avert losses and keep up with its peers.
“Timeless” strategy
While Bar Dea has made plenty of changes, he has preserved the essentials of the investing approach he inherited from Dalio. Money management is largely centralised and run by what Dalio called “timeless and universal” investment rules developed over decades and then plugged into a computer model.
The challenge, said the sources close to the firm, has been to adapt the models fast enough. Markets get more efficient, and unforeseen events such as a worldwide pandemic or negative interest rates demand quick reactions. Bar Dea has responded by pledging to lean into AI (artificial intelligence) and machine learning.
Employees have complained over the years because they wanted the models to be more dynamic, and they needed Dalio’s approval to alter them. He was not always open to change, former employees said.
When the committee began handling investments in 2020, Bridgewater expanded the number of people who could see the entire model. Now, more senior people were privy to ideas that were already in the system, so they knew what might be missing, so improvements came faster and more easily.
Cost cuts
Bar Dea’s overhaul has stirred up some friction at the firm over who got promoted – and led to legal action.
As Bridgewater’s biggest fee-generating fund has shrunk, the firm has had to rein in costs. It said it would reduce 401(k) matches in years when performance lags. It also skewed senior investment professionals’ pay to align more closely with fund performance. While the firm made that change to incentivise senior staff, it has also meant Bridgewater will spend less on compensation during bad years.
The biggest and most public move to cut costs came from the firing of 100 people, or roughly 8 per cent of its staff, in March 2023, including veterans who had been with the firm for decades. In some cases, Bridgewater enforced a long-time policy of mandating two years of unpaid gardening leave, even though employees didn’t choose to depart, said the sources.
Two of the fired employees – Paul Ross, who had worked at Bridgewater for almost 20 years, and Jeff Gardner, who had been there for almost three decades – accused the firm of favouritism, as well as age and sex discrimination in the wake of Bar Dea’s former romantic partner and her ex-fiance being promoted in the shake-up.
Bridgewater has not commented on the contents of a court petition the pair filed to seek information from the firm in preparation for a possible suit. It filed papers earlier this month seeking to move the case to arbitration, contending the two were turning to the court and media for a “large payout”.
The firm said in the filing that Ross received three justifications in February 2023 for his termination, including that he did not have enough experience as an investor, and that his “multimillion-dollar compensation package could not be justified in light of the need to make reductions”.
Meanwhile, Bridgewater said Gardner was offered multiple positions at the hedge fund, but he turned them all down, “insisted on leaving” and demanded an “extremely large” severance payment.
The firm’s assets have already dropped to US$75 billion from a peak of around US$100 billion. Soon, the world’s largest hedge fund might not have that label anymore. But if Bar Dea’s plan succeeds, it will be a better-performing one. BLOOMBERG
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