The Ultimate Boom
This chapter covers the success of Bridgewater from a boutique firm to an institution. The core of the company however remained the same – invest in technology to get insights that are not possible through manual research.
Ray was enthusiastic about financially engineering products in order to suit the client’s needs. One such discovery was investment in inflation indexed bonds (IIB). IIBs are bonds whose coupon rates are adjusted to inflation. For example, if inflation rises from 2% to 4%, the bond will compensate the investor for the increase in inflation by increasing the coupon rate on the bond.
Such bonds were unavailable during 1995, however, when a client Davind White (portfolio manager at Rockefeller Foundation) asked Ray for an investment in order to make 5% above US inflation rate, Ray suggested buying foreign inflation indexed bonds. However, as you might remember from earlier chapters, investment in foreign assets involves currency risk, hence Ray advised him to hedge it by buying US Dollars as well in order to manage currency risk. This was a very innovative product during that time.
When this gained popularity and caught the attention of the US Treasury Department, Ray and his team were called in as experts in order to introduce a similar IIB in the US as well.
The diversified portfolio approach that Ray uses focuses on earning optimal return while keeping the risk in check. Through his research mindset he was able to think of an appropriate asset allocation mix that could grow and preserve wealth for generations. And as he accepts, the journey to achieve this excellence involved various mistakes, however learning and adjusting the model appropriately was the key to success. As per Ray, it was growth (economic growth) and inflation that affected the returns of asset class. Hence, he builds portfolios around the following four scenarios:
- Rising growth and falling inflation
- Rising growth and rising inflation
- Falling growth and falling inflation
- Falling growth and rising inflation
With the help of his co-CEO at Bridgewater, Dan, he was able to build a portfolio, henceforth known as “All Weather Portfolio”. When this was commercially marketed it started with one single investor, Verizon, but soon gained popularity and within a year dozens of investors. They were managing a total of $80bn for this strategy.
Similar to the investment strategy, Ray had systematized the human resource management activities at Bridgewater as well. One of the methods he used was psychometric testing. This involved using Myers-Briggs Type Indicator (MBTI)
[read more here: https://www.myersbriggs.org/my-mbti-personality-type/mbti-basics/] for assessing the growth roadmap for an individual based on its present characteristics. The other instance was using baseball cards that mentioned the stats of an individual. This method allowed managers to understand the interests and potential of employees and allocate work accordingly.
By a combination of prudent investment style and systematized human resource management, Bridgewater was able to dodge the 2008 financial crisis. They were up 14% in 2008 when most of the other funds were down by double digits. It was in the year 2000 itself that they had developed a “depression gauge” that provided insights when the economy could be in recession. Due to his consistent performance, Ray was involved in various government advisory projects as well and has a high reputation in the financial services industry.