Review: The Fund

 The Fund is Rob Copeland's take down of Ray Dalio.  Ray Dalio is the founder/owner of Bridgewater Associates, a hedge fund that purportedly had a phenomenal track record of beating the market, and Dalio himself became a celebrity, writing Principles, which was actually quite a good book, and follow on books that I thought was awfully fawning of a Chinese authoritarian system that was probably more about talking up Dalio's Chinese corporate/personal investment portfolio than based on reality.

I expected an account of Ray Dalio's rise and perhaps some expose of the secret sauce behind Bridgewater Associates, but to be honest the entire book was expose. There's an early section on Ray Dalio's background and how he got rich (hint: marry a wealthy person!), but the sections on how he managed to get pension funds to give him money to manage were given short shrift, as was the heuristics/algorithms he used to become successful early on.

Most of the book focuses on post-success, where the principles he espoused actually got turned into a horrible nightmarish social-network based pile-on app used inside the company. This mechanism was made worse by Dalio rejecting any criticism of it and taking on the form of the final arbiter. What really astonished me was that Dalio was selling pieces of Bridgewater to his own employees through an employer-financed loan. His second in command therefore was living a hand-to-mouth lifestyle:

Over just three years, 2011, 2012, and 2013, industry researcher Alpha reported that he made $815 million in total. While just a fraction of Dalio’s compensation, it was also enough to vault Jensen onto the industry lists of the highest-paid hedge fund managers—he made more than most of those who ran their own firms. Only a handful of people knew, however, another reason for him to stay. The Bridgewater founder had concocted a complicated arrangement in which the more money that Jensen seemed to make, the more he actually owed. Dalio had challenged Jensen, as a condition of the younger man’s employment, to slowly buy out the Bridgewater founder’s ownership. Jensen didn’t have nearly enough money, so Bridgewater lent it to him—essentially transferring slivers of his ownership each year, building up a gigantic IOU to the hedge fund’s majority shareholder, who just so happened to be Dalio. Jensen’s debt skyrocketed as the value of Bridgewater rose. When Dalio sold a piece of the firm to the Texas teachers’ pension fund, not only his own stake was impacted. Since Bridgewater was now worth more, it made Jensen’s own tithe that year even more expensive as well. (kindle loc 2926)

This seems like a particularly bad deal, and poorly negotiated for his employees while enriching himself, hardly the "principled" man Dalio like to style himself. The various shenanigans surrounding sexual harassment was just as bad though perhaps all too common in the age of "me-too" revelations to raise too many eyebrows.

What surprised me in the book was that Dalio was perpetually pessimistic about the US economy. We know that over the last 50 years, the US stock market has been on an incredible bull run, and anyone betting consistently against it should have been wiped out, but apparently his algorithms worked even when he was pessimistic his funds were still doing well. His pessimistic outlook also meant that he loved autocrats:

Since the late 1980s, Dalio had been convinced that the United States was in an inextricable fall, not merely economically, but culturally. He saw U.S. politics as on a slow descent into unproductive squabbling, a journey that could end in nothing less than another civil war. At times, he called himself “an economic doctor,” with the prescription to fix all that. In place of U.S. hegemony, Dalio looked for a better blueprint abroad. He seemed particularly smitten with societies ruled by powerful autocrats. Thanks to Bridgewater’s long history of managing money for Singapore’s government-run funds, Dalio became friends with Lee Kuan Yew. The elder man, who served as Singapore’s prime minister for a staggering thirty-one years, was a controversial figure whose long tenure achieved stability for his nation at the cost of freedom. Lee governed through what was essentially one-party rule, restricting freedom of speech and dismissing the value of democracy...Over dinner at Dalio’s New York apartment shortly before the Singaporean leader’s death, the men discussed the best models among world leaders. Lee gave an unlikely answer in a posh Manhattan setting: Vladimir Putin. The Russian leader, Lee said, had stabilized Russia after the chaotic collapse of the Soviet Union. To Dalio, the analogy would have been seamless. He, too, had stabilized Bridgewater after a tumultuous stretch. (kindle loc 3476-3487)

 The book also covered the gross mismanagement of top talent that Dalio had hired for Bridgewater, including Jon Rubinstein and David Ferruci, both of which wanted nothing to do with Dalio's "Dot Connect" app but were roped into doing them anyway. Rubinstein in particular complained about Dalio's Principles, which wasn't the clean version he espoused in his book but an unwieldy, constantly changing giant ass book:

Once Dalio caught word that his new prized hire had struggled in boot camp, he asked for some time to chat. Rubinstein, cognizant of everything he’d learned about the Bridgewater founder’s love of raw honesty, decided to tell Dalio what was on his mind: “You’ve got three hundred and seventy-five Principles. Those aren’t principles. Toyota has fourteen principles. Amazon has fourteen principles. The Bible has ten. Three hundred and seventy-five can’t possibly be principles. They are an instruction manual.” (kindle loc 3723)

 The book covers the years of Bridgewater's underperformance perfunctorily --- there's an offhand suggestion that once computers became powerful enough and the rest of wall street started hiring up quants and computer scientists to do stock market analysis, Dalio's heuristics no longer offered a competitive edge and instead started to underperform the market. At this point apparently a lot of the money being managed is coming out of new rubes in totalitarian countries where Dalio has managed to cultivate sufficient contacts to have an information advantage with which to make investments, and even those aren't sufficient.

Take downs are fun to read, and this one was compelling. While Principles was good reading in theory, as usual in practice the implementation is more than a little tricky, and Dalio's success had nothing to do with his principles but a matter of being early enough and lucky enough to have money fall into his lap in big chunks (marry rich and be a good salesman). I'm much reminded of Google's promotion committees and how despite the high sounding principles only succeeded in making Google's promotion system even more political than the traditional manager-led promotion system. It's worth reading this book after reading Principles. It also explains why Dalio is such a China-supporter and all I can say is that the business/popular press loving to lionize businessman billionaires from Steve Jobs to Rockefeller to Elon Musk has a lot to do with the worst things happening to society today.

Recommended.