When a dominant type-A (often alpha male) personality runs an investment management firm that beats the market by defying convention, it often brings fine results. It can also bring internal resentment, restiveness and ultimately rebellion against the boss.A pinch of salt? As I wrote earlier this week when I went over hedge funds getting crushed, I would take this stuff on Bridgewater's 'radical transparency' with a whole shaker of salt:
This happened two years ago at Pimco — when a dispute between Bill Gross, its co-founder and investment guru, and Mohamed El-Erian, his deputy, led first to Mr El-Erian and then Mr Gross leaving. Trouble has now broken out at Bridgewater Associates, on some measures the world’s most successful hedge fund in the past four decades, involving Ray Dalio, its founder.
So far, Bridgewater’s discontent has been contained. Mr Dalio and Greg Jensen, who works with him as co-chief executive and co-chief investment officer, seem to have settled their argument. They have done so using its unusual, seemingly kooky, framework for ensuring “radical transparency” by taping everyone’s conversations.
The resolution, under which Mr Jensen may curb one of his roles to focus on the other, could go down as a victory for Mr Dalio’s style of consensus. That is how Mr Dalio, who has run Bridgewater since 1975 and produced $45bn of returns in its Pure Alpha fund, sees it. We shall discover whether he can cede power to the next generation more gracefully than Mr Gross.
Meanwhile, it focuses attention on Mr Dalio’s management formula of “meaningful work and meaningful relationships through radical truth and radical transparency”. This means its 1,500 employees speaking their minds openly and being taped so that everyone can hear what they said. No one should be a “slimy weasel” (the official Bridgewater term) by plotting in secret.
Mr Dalio can sound like the L. Ron Hubbard of the hedge fund industry. Scientology seeks to turn followers into “clears” by eliminating their “reactive minds”. Mr Dalio has developed a set of principles aimed at stopping employees from being “emotionally hijacked” by their instincts when criticised or contradicted and instead reflecting with their brains’ prefrontal cortexes.
Bridgewater is not as sinister or totalitarian as Scientology or religious cults. Mr Dalio is more well meaning than that. The fact that his method of running his firm seems so weird reflects badly on the dishonesty and obfuscation that passes for “human resource management” elsewhere.
Everyone knows that workplace communication is often strained and insincere. As Mr Dalio complains, executives discuss their dissatisfaction with an employee behind closed doors, then call in the unfortunate and “give him some lousy spin” that is demoralising yet imprecise. Despite the fashion for “360-degree appraisals” and team working, the truth gets disguised.
Mr Dalio will not tolerate this. Everyone at Bridgewater is told to say exactly the same thing to everyone, especially when they disagree. If there is any tension, they have to “get in sync” by hashing it out openly — one motto in his 123-page Principles is that “thoughtful disagreement radically improves understanding”. Through it, Bridgewater’s collective intelligence evolves.
It has a whole set of paraphernalia to enforce Mr Dalio’s management ethos. There are iPad apps on which to record feelings of pain or frustration, or mark instant reactions to a colleague’s words or deeds. Its tapes are being catalogued so that anyone can locate anything that someone has said about them. Bridgewater is becoming a giant behavioural database.
It is very intriguing but I have three doubts. First, like other pseudoscientific theories it attempts to treat humans like machines. Mr Dalio tells executives to “manage as someone who is designing and operating a machine”, and once described Mr Jensen as having “the best package of character attributes I’ve seen”, which made him sound like an advanced android.
People are not machines and have instincts for a reason. It would be easier for managers if logic ruled and emotions were banished from workplaces but that is impossible. People often react to criticism as a threat because they rightly divine that it is a threat — Mr Dalio advocates firing people for whom the right job cannot be found.
Second, it is elitist. Bridgewater is a smallish organisation that hires from top universities such as Princeton and Harvard, and loses 35 per cent of new recruits within 18 months because they underperform or cannot “get to the other side” of their emotions. Scaling it to big organisations that are not stuffed with hyper-competitive overachievers would be even harder.
Last, it can stifle dissent. Police states monitor citizens to block any uprisings. This might not be the intention at Bridgewater but it has that effect. A technique that is designed to keep managers honest also prevents anyone from plotting rebellion without first notifying Mr Dalio.
The details of the dispute are unclear — Bridgewater is not that transparent — but Mr Jensen is reported to have questioned Mr Dalio’s commitment to succession while Mr Dalio was unhappy to hear of this second hand. The result is that Mr Dalio remains in charge.
Mr Dalio wants to spread his gospel of transparency to other companies. Given the flaws in how others handle employees, it is worth taking seriously. But I would take it with a pinch of salt.
As I recently noted in my review of the best and worst hedge funds of 2015, Bridgewater's Pure Alpha's performance while positive was unimpressive in a year full of macro events. And most pensions are heavily invested in the All Weather Fund and they're losing money in the last three years, especially last year when mad money wreaked havoc on risk parity strategies.For me, all this stuff on "radical transparency" is just marketing fluff and it's a huge distraction for everyone, including Ray Dalio and the employees at Bridgewater. Imagine going around with an iPad to every meeting where you know you're being taped and rating your colleagues?
Three years ago, I openly worried that the world's biggest hedge fund was in trouble but nobody was paying attention. When you see public disagreements like this being aired out in the media, it's not a good sign no matter what Ray Dalio and Greg Jensen state.
Let me take it a step further and openly question whether Bridgewater's obsessive focus on "radical transparency" is diverting its attention away from much more pressing cultural and performance issues at the fund. There's something going on at Bridgewater and I don't like it one bit.
Dalio may be warning of asymmetric downside risks in the global economy but he should think long and hard of the asymmetric power structure at his fund which gives the impression that he likes to be openly challenged but in reality, what he says goes.
How do I know? I met the man, think very highly of him and his fund, was among the first pension fund managers in Canada to invest in Bridgewater back in 2002, but he's very imposing and intimidating and I get the sense that a lot of employees there fear him. And when you live in a constant state of fear and have to constantly rate each other (which breeds paranoia, not cooperation, and stifles creativity), a lot of internal angst and animosity which has been bottled up for years is bound to seethe through at a time when the fund is losing money. I think this is what's happening now.
I could be wrong but I think Ray Dalio needs to focus less on "radical transparency" and more on radically transforming the culture of his shop. And no matter what he says, it's still his shop and anyone who challenges that in any way, shape or form will be led to the guillotine.
Thinking back to my on-site due diligence of Bridgewater, this would explain why I felt most people there were tense and scared. Gapper is right, people aren't robots, and while Ray Dalio may have mastered the machine, his attempt to master the right culture at Bridgewater has backfired on him, exposing a much more paranoid, cynical side of what all this radical transparency is all about -- to control people and stop any revolution from within the ranks to overthrow King Dalio.
Ok, maybe I'm being too harsh, maybe Ray has great intentions and I have to admit, I like some of his principles, especially the ones on dealing with slimy weasels (if you can't say something to someone's face, you're a slimy weasel, period).
But the bigger problem I have with this "radical" view of how people should interact in a company, especially a large hedge fund full of competitive individuals is on philosophical and ethical grounds. Let me explain. Ray Dalio has mastered the machine but people aren't machines. His mechanistic/ deterministic view on markets and how the economy and world works cannot be translated into the way people should or can realistically interact with each other.
In short, people aren't machines and when you try to impose some mechanistic deterministic view on how they should interact with each other (in order to control them?), you're bound to stifle creativity and breed contempt and an atmosphere of animosity, especially when the fund underperforms.
What else? I believe what ultimately matters is what Bridgewater employees are thinking and saying when the cameras and iPads are off or when they leave the shop. Bridgewater can tape all the meetings they want but Ray Dalio can't read minds and he doesn't know what is being said in private when employees are venting to each other (unless he's secretly taping them at the workplace and their homes, which is a sign of disrespect, not to mention it exhibits traits of a delusional paranoid tyrant).
Also, Gapper is right, there's an elitist air to all this. They hire a bunch of Ivy League kids and if after 18 months they manage to "get to the other side" of their emotions they then become part of the Bridgewater "Navy Seals," the select few who have mastered their emotions and are able to view things without their emotions getting in the way.
It's such nonsense and while it's great for marketing purposes, when the fund starts losing money, it exposes the shortcomings of this elitist mechanistic approach. Worse still, it leaves no room for real diversity at the workplace (how many people with disabilities does Bridgewater hire?) and you end up with a bunch of emotionally challenged robots at "the other end" who follow rules to conform to what their master wants, not because they truly believe or want to live by these ridiculous rules governing their every interaction.
Sure, Bridgewater is a great hedge fund, one of the best. But in my opinion, it's a victim of its success and it's gotten way too big and in order to control this explosive growth, they've implemented this 'radically transparent' cultural approach without properly thinking through what this entails or whether it stifles diversity, creativity and camaraderie.
Now, I'm not an expert on all this corporate culture stuff. I'm the type of guy who wears his emotions on his sleeve. I've been told that I could be blunt, abrasive at times, especially when arguing my point, which is why I'll stand up to guys like Dalio without giving it a second thought. This is why when I pressed him hard on the U.S. housing market bubble bursting and deflation back when we met over ten years, he snapped back: "Son, what's your track record?".
If I had an iPad to gauge how I felt back then, I would have hit the "WTF?!?" button even though Dalio was just trying to make a point that he's always agnostic on markets and thinks his All Weather fund is great at handling any economic scenario (turned out he was wrong). And I would have hit the "very annoyed" button on the way back to Montreal every time Gordon Fyfe was teasing me about Dalio's response.
To be honest, I had fun on that trip and enjoyed meeting Ray Dalio, Bob Prince and (I think) Greg Jensen. I don't know if they taped our meeting but if they did, I wasn't aware of it but would love to see it again.
Anyways, Ray is Ray and he worked very hard to build Bridgewater into a global powerhouse. He now enjoys billions in wealth and is defending his approach. He and other hedge fund and private equity billionaires are extremely lucky to have ridden the wave of the institutionalization of hedge funds and private equity, but I think this schism at Bridgewater is exposing some serious growing pains and perhaps something more ominous. In my opinion, it's definitely something worth monitoring more closely.
Also, remember what I keep telling you. When it comes to hedge funds, you have to grill them hard no matter how poorly or well they're performing. I don't care if you're sitting in front of Ray Dalio, Ken Griffin, Izzy Englander, Paul Singer, David Tepper, Bill Ackman or whichever hedge fund superstar, you need to ask tough questions and if they get annoyed, keep harping on them.
The problem in our society is we idolize hedge fund and private equity billionaires as if they're infallible gods. News flash, they're not infallible and they put their pants on one leg at a time.
That reminds me, I think the guys and gals at Bridgewater need less radical transparency and more cowbell. They also need to Bern their enthusiasm! Have a great weekend and please remember to donate and subscribe to this blog on the right-hand side under my picture. If you have anything to add on this or any other topic I cover, feel free to reach me at LKolivakis@gmail.com.
need more cowbell from nicemusicltd on Vimeo.