The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds (4 page)

BOOK: The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds
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One thing that mystified me was how, through various applied strategies, managers were able to profit by using publicly available information, and by seeing things in that data that the majority of investors could not see.

 

Part of it has to do with conviction of character. You will see each of these managers at one time or another with their backs up against a wall and the wolves circling in. Yet they stand their ground time and time again. They are not always media favorites for it, but they hang on to their own conviction with a steadfast faith in what they know to be true and wield it to their advantage.

 

This isn’t a guideline for how to be like the men profiled in the pages that follow. This is simply the retelling of their stories, the memories that make them who they are, and how they got all of that to work for them. Some came into the game knowing how to play and some invented the rules as they went along, but each instilled their core personalities into their work. The lesson to be learned is that you don’t have to be
them
for it to work. You just have to make a proven strategy yours. You will take hits. You will take losses. But so long as you do your own research and make the trade your own, you can always land on your feet.

 

The nature of humanity is that people reveal themselves (not to everyone, not always, but eventually). These are the stories of the moneymakers. They are the big players; the behind-the-curtain rock stars whose strategies and successes surpass those of the vast majority of investors around the globe.

 

These are the alpha masters. I hope you find their revelations as fascinating as I do.

 

Maneet Ahuja

 

April 2012

 

Disclaimer

 

This material contained in this book does not constitute an offer or solicitation in any jurisdiction to any person or entity. The information contained herein is not complete with respect to any of the funds described in this book (collectively the “Funds”), including without limitation, important disclosures and risk factors associated with an investment in the Funds, and is subject to change without notice. To the extent that the information contained herein becomes outdated or is otherwise incorrect, we have no obligation to update or correct such outdated or incorrect information. Offers to sell interests in the Funds are made only by the respective Funds’ Private Placement Memoranda (each, a PPM) and not by the information contained in this book. In the event that the descriptions or terms in this book are inconsistent with or contrary to the descriptions in or terms of the respective Funds’ PPM, Partnership Agreement/Memorandum and Articles of Association (as applicable) or such other documents, the PPM, Partnership Agreement/Memorandum and Articles of Association (as applicable) and such other documents shall control.

 

The interests of these Funds have not been approved or disapproved by the U.S. Securities and Exchange Commission (SEC) or by the securities regulatory authority of any state or of any other jurisdiction, nor has the SEC or any such securities regulatory authority passed upon the accuracy or adequacy of this document. Any representation to the contrary is a criminal offense. The interests have not been registered under the U.S. Securities Act of 1933, as amended (the Securities Act), the securities laws of any state or the securities laws of any other jurisdiction, nor is such registration contemplated. The interests will be offered and sold in the United States under the exemption provided by Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder and other exemptions of similar import in the laws of the jurisdictions where the offering will be made. The interests will be offered and sold outside the United States under the exemption provided by Regulation S under the Securities Act. The Funds will not be registered as an investment company under the U.S. Investment Company Act of 1940, as amended (the Investment Company Act). Consequently, investors will not be afforded the protections of the Investment Company Act. There is no public market for the interests and no such market is expected to develop in the future. The interests may not be sold or transferred except as permitted under the Partnership Agreement, and they are registered under the Securities Act or an exemption exists from such registration thereunder.

 

Past performance in any of the Funds does not guarantee future results. There is no assurance that the Funds will necessarily achieve their investment objectives or that they will or are likely to achieve results comparable to those shown in this book, or will make any profit, or will be able to avoid incurring losses. Investments in the Funds are subject to a variety of risks (which are described in the respective Funds’ PPMs). Investments in the Funds are suitable only for qualified investors that fully understand the risks of such investments. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. An investor should review thoroughly with his or her advisers the respective Funds’ PPMs before making an investment determination. None of the managers of the Funds described in this book nor any of their affiliates are acting as an investment adviser or otherwise making any recommendation as to an investor’s decision to invest in the respective Funds. Certain statements in this book, including, without limitation, forward-looking statements (which are made in reliance upon the “safe harbor” provisions of the federal securities laws), constitute views of the portfolio managers of the respective Funds regarding the current state of the markets and the potential availability of investment opportunities for the Funds. The statements are made based on such views as they exist as of the date of this publication. Such views are subject to change without notice based on numerous factors, such as further analyses conducted by the portfolio managers of the respective Funds, and changes in economic, market, political and other conditions that may impact investment opportunities. There is no assurance that such views are correct or will prove, with the passage of time, to be correct.

 

No representations or warranties, express or implied, are made as to the accuracy or completeness of information in this book obtained from third parties. The information contained herein may change at any time without notice and there is no duty to update the person or firm to whom this information is provided. Each manager of the Funds described in this book expressly disclaims liability for errors or omissions in the information and data presented herein and for any loss or damage arising out of the use or misuse or reliance on the information provided including without limitation, any loss or profit or any other damage, direct or consequential. No warranty of any kind, implied, expressed or statutory, is given in conjunction with any of the information and data contained in this book.

 

Chapter 1

 

The Global Macro Maven

 

Ray Dalio

 

Bridgewater Associates

 

Above all else, I want you to think for yourself—to decide 1) what you want, 2) what is true and 3) what to do about it. I want you to do that in a clear-headed thoughtful way, so that you get what you want.

 

—From the introduction to Ray Dalio’s Principles

 

In his famous
Principles
, Raymond, or “Ray,” Dalio tells his employees, “You learn so much more from the bad experiences in your life than the good ones. Make sure to take the time to reflect on them. If you don’t, a precious opportunity will have gone to waste. Remember that pain plus reflection equals progress.”

 

This is just one of the many aphorisms, precepts, nuggets of wisdom, and practical management tips that the 62-year-old Dalio—the founder of Bridgewater Associates, the global macro fund that is the world’s largest hedge fund, with $120 billion under management—emphasizes time and time again. Bridgewater advises and runs portfolios for the most powerful pension funds, central banks, and countries around the world. In fact, a recent study by London-based research firm Preqin shows that Bridgewater is the most popular hedge fund among public pensions.

 

If you did a quick search on Dalio, you’d be flooded with stories of his firm’s success in the markets (including generating its best returns in the most difficult markets of the last decade) and get a fair dose of his philosophy on life and management. For example, Dalio has been practicing transcendental meditation for more than 40 years and calls it “the single biggest influence” on his life.

 

You’d also find that his most important maxims involve his relentless “pursuit of truth” and hunger for “personal evolution.” His unwavering focus on these goals has no doubt affected his performance figures and client satisfaction for the better, but has earned him mixed reviews from employees, some of whom judge his approach as unnecessarily harsh. Dalio is unapologetic. In his
Principles
, Dalio proudly says, “I have become a ‘hyperrealist.’ ”

 

Dalio is also well known for how his big-picture, innovative thinking has changed investing in important ways. In fact, industry magazine
aiCIO
devoted its December 2011 cover story—“Is Ray Dalio the Steve Jobs of Investing?”—to him, highlighting the similarities between the two leaders’ motivations and approaches and how each has impacted his industry. Dalio, like Jobs, feels his life is a journey during which he must turn his bold visions into reality. Dalio’s industry-changing innovations have earned him two lifetime achievement awards and won Bridgewater dozens of “Best of” awards.

 

Dalio says the form of meditation he practices “is a combination of relaxation and a very blissful experience. That sounds more like an orgasm than it really is; by blissful I just mean that I just feel really good and relaxed and in good shape. You go into a different mental state—neither conscious nor unconscious. But unlike when you’re sleeping, if a pin drops all of a sudden, it can reverberate through you; it’s shocking.”

 

It took some time for Dalio to discover a meditation technique he could master, but eventually he began to notice that even 20 minutes of meditation could make up for hours of lost sleep. It also began to change the way he was thinking about things: he became more centered and more creative. Meditation put Dalio in a clear-headed state so that when challenges came at him, he could handle them “like a Ninja—in a calm, thoughtful way.” He says, “When you’re centered, your emotions are not hijacking you. You have the ability to think clearly, put things in their right place, and have good perspective.”

 

The Makings of a Maven

 

Sitting in his modern Westport, Connecticut, office in a blue Bridgewater polo shirt and khakis, Dalio seemed comfortable and at peace. But cultivating a calm mind and demeanor hasn’t dampened his lifelong desire for independent thinking. Growing up the son of a jazz musician and a homemaker, Dalio didn’t like following instructions or remembering what he was taught. Instead, he loved chasing after what he wanted and figuring out for himself how to get it. Because his parents afforded him the freedom to do this, he feels, he received a better-than-normal education, learning more from negative experiences than the positive ones and developing the skills that serve him so well to this day. One of the problems with traditional education, Dalio believes, is that it punishes people for making mistakes rather than teaching them how to use those mistakes to learn and grow.

 

The idea of someday starting his own firm was the last thing on his mind when a 12-year-old Dalio began caddying to make extra money at the Links Golf Club in Manhasset, New York, near his home. He earned $6 a bag and had some regulars, many of whom were Wall Street investors. It was 1961, and he felt like he heard about stocks everywhere he went. “If I got a haircut, the barber would be talking about stocks,” he remembers. “If I got my shoes shined, the shoeshine guy would be talking about stocks. I didn’t know if I could do it, but it looked very interesting to me.” Dalio began combing the
Wall Street Journal
and started looking for stocks that fit his criteria: they had to cost less than $5, have a name he had heard of, and be available if he wanted to buy more. He landed on Northeast Airlines, a stock that tripled in value shortly after his purchase. “I saw all these names in the paper and figured it must be easy because I only have to pick one that goes up. If that didn’t happen and I lost money,” says Dalio, “I could have easily ended up in another field.” The big win with his first stock piqued his interest to continue. So he began reading
Fortune
magazine, and sending in coupons requesting corporate annual reports. “The mailman would lug in all these annual reports and I would spend hours studying them.” Studying caused him to ask a lot of questions. “And questions lead the way,” he says. “Learning is through questions, it’s not through being told.” Through the 1967–1968 bear market, he taught himself how to sell short and by the time he was in high school, he had already amassed a stock portfolio worth several thousand dollars.

 

In 1967, Dalio was admitted, just barely, to Long Island University’s C.W. Post Campus in Brookville, New York. Unlike in high school, in college Dalio thrived. He took some finance classes and developed a love of learning. He could finally learn about things that interested him and, for the first time, studied because he enjoyed it, not because he was forced to. He also learned to meditate during his freshman year. Dalio did so well that, after graduating, he gained admission to Harvard Business School. “With a more centered, more open state of mind, everything got better. My grades went up. Everything became easier,” he says with a smile.

BOOK: The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds
3.3Mb size Format: txt, pdf, ePub
ads

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