Bloomberg interview with Ray Dallio, Founder, Bridgewater Associates

Ray Dalio, Founder,BridgewaterAssociates

2011-09-15 21:33:36.537 GMT

      (This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)


     SEPTEMBER 15, 2011






      MARGARET BRENNAN, BLOOMBERG NEWS ANCHOR: Bloomberg Markets magazine built an exclusive list of the 50 most influential players in the financial world. And with markets, they shape economic policy. 

     And they’re speaking today. Those players in Lower Manhattanand so is our Erik Schatzker on stage right now with Ray Dalio, the man who runs the world’s biggest (ph) hedge fund, Bridgewater Associates. Let’s listen in.

     ERIK SCHATZKER, BLOOMBERG NEWS ANCHOR: People who know, Ray, that you have, as Rod (ph) just alluded to, delivered some astonishingly big and consistent returns, some 15 percent a year for 20 years in your biggest fund.

     And on an extraordinary scale,BridgewaterAssociates, his firm, manages more than a hundred and 20 billion dollars.

      And you know, that you predict a long and painful recovery for much of the developed world, especially the peripheral EU. What they’ve come for, though, is a taste of the secret sauce.

     So first, I want to give you an opportunity, if you will, to briefly explain what a principle is, because it is going to be central to our conversation.

     And the principles are often confused for something else. So set us straight.

     RAY DALIO, FOUNDER,BRIDGEWATERASSOCIATES: OK, so I don’t mean an esoteric sort of thing, and I don’t mean like to be lecturing to people about what their principles should be.

      I just want to clarify that what I mean is principle means a description, first of all, an understanding of what reality is and how reality works.

      Reality works in a certain way. And so, for example, there is an economic machine. And so when we’re talking about

the financial crisis or we’re talking about deleveraging, there is a machine.

      The machine works in a certain way. Can we describe how the machine works? We should be able to describe how does a machine works. How does deleveraging work?

      And then we also should be able to say, given that reality works that way, what is my principle for dealing with reality? A principle means how do you deal with reality to get the outcomes you want.

      So that could apply to any part of life. If you’re learning how to ski and you say, put your weight on the downhill ski, it’s just the reality that that’ll help to make the turn better.

      So it’s what are your descriptions and means of dealing with reality so you get what you want. That’s all I mean.

     SCHATZKER: Many of us here are interested in understanding – most, I mean, and they can go and read about your principles for life, your principles for management and perhaps, even a bit about your principles for the economy.

      And I’ll get to that at the end. They want to know a bit more about your principles for investing. Can you give us a few good examples?

      DALIO: OK, an example would be that what I call “the holy grail,” OK? If you get this, you will get all the riches in the universe. Or you will make a lot of money.

      That is that if you have 15 or more good, uncorrelated return streams, that the math of that is such that if you go from one to two uncorrelated return streams, that you will reduce your risk by about 80 percent at about 15.

     And there’s a certain math to it. There’s a certain structure to it, if I was to show you a chart.

      I could describe mathematically so that, for example, if I had returns dreams that are 60 percent correlated and I had a thousand of them, I would only reduce the risk by about 15 percent.

      So and it’s after five or six, it’s limited so that there’s a certain notion about, when approaching investing, what do I want? I need to have a certain structure.

      That can come in the form of alphas and betas. So of (ph) betas – what is my risk-neutral position? So I’ll say that everybody in the room.

      They say, what should I invest in? They don’t start off, I think, with what is the neutral position. What represents a good neutral position, balanced?

      For example, does gold represent a part of my portfolio? If I had no view, what should the concentration in dollars be?

      What is a structural beta portfolio? And then how do I take a deviation from that data portfolio, which is the alpha, in order to add value?

      And how do I do that in an uncorrelated way so that I can then maximize my return to risk?

      So in that first principle, what I’m saying is that if you follow that first principle and you get 15 good – that would have to be great – uncorrelated return streams, you’ll improve your return to your risk by a factor of five, OK?

      That means five times the return for the same amount of risk. That’s just a principle. That’s a reality. Everybody would agree on the math of it.

      And then, that’ll determine an action. So what am I going to do when I’m structuring (ph) my portfolio?

      That’ll influence the way that I structure my portfolio to get what I want.

      SCHATZKER: People say correlation among different asset classes is increasing, making the job of being a macro hedge fund manager harder. Is that true?

      DALIO: No. So I think I’m worried that we can digress into the nature – I think that there is an intrinsic characteristic that determines the returns of asset classes.

      So a very simple example would be, if inflation was to come down by a certain amount, you multiply that times the duration of the bonds.

      And all things being equal, it will carry over to the bond returned. And so that there’s a certain structure that exists in asset classes.

      There is no such thing as an intrinsic classic correlation.

      So the relationship between bonds and stocks, for example, can either be positively correlated or negatively correlated, depending – and both of them makes sense, if you know what determines the pricing of that asset class.

      So bonds are always logical in that way. Stocks arealways logical. But if you come into a time, for example, when economic uncertainty and volatility is greater, then they’ll be negatively correlated.

      If you’re in a period of time where inflation uncertainty and volatility is greater, they will be positively correlated. Both of those things are logical, OK, if you know how they behave.

      Therefore, it’s that understanding, not a fixed notion that there should be a correlation. That fixed notion of the correlation doesn’t exist.

      There’s no such thing as correlation. There’s only the logical behavior of each of those two markets that then will

determine its relationship.

      And so when I say uncorrelated asset classes, what I’m really doing is not using the classic measure of correlation like its stocks and bonds are 40 percent correlated when I’m, instead, really referring to is do you know how they behave?

      And isn’t it going to intrinsically behave alike or differently?

     SCHATZKER: Many other – call them macro…

     BRENNAN: You’ve been listening to a hedge fund manager, Ray Dalio, responding to our own Erik Schatzker’s question to the Bloomberg Market conference about how he views study of portfolio strategy, how he manages money right now in talking about what has been a really high level correlation, I should say, among asset classes of late.

      That’s a presumption. And he’s actually saying, it isn’t as hard to be a macro investor right now as some have said. Now, we’re going to continue to monitor that conversation.




1. Ray Dalio interview with Bloomberg audio clip

2. related article about Bridgewater’s amazing run of good performance for decades


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