**Date Published:** 2011-05-11 **Link:** https://www.newyorker.com/magazine/2011/07/25/mastering-the-machine **Overview:** An article on [[Ray Dalio]]. ## Highlights ### Radical candor > Like virtually all meetings at Bridgewater, this one was taped. Dalio says that the tapes—some audio, some video—provide an objective record of what has been said; they can be used for training purposes, and they allow Bridgewater’s employees to keep up with what is going on at the firm, including his discussions with senior colleagues. “They get to see all of my mistakes,” Dalio told me. “They get to see all of my humanity.” > > Once a tape recorder had been switched on, Jensen, McCormick, and Dalio discussed the possible promotion of an internal candidate to a senior-management role. McCormick, a soft-spoken forty-five-year-old who studied engineering at West Point, argued that the candidate’s prior experience at a big Wall Street firm indicated that he could probably do the job. Dalio disagreed. An investment bank is a “totally different world,” he said. But, rather than continue the discussion, he asked one of his assistants to call in the candidate. One rule of radical transparency is that Bridgewater employees refrain from saying behind a person’s back anything that they wouldn’t say to his face. I find this fascinating. And very autistic. Recording a discussion like this for anyone to see is... bold. *** ### The history of the hedge fund > [[Hedge fund]]s date to [[1949]], when [[Alfred Winslow Jones]], a writer at [[Fortune Magazine]], opened a private investment firm using sixty thousand dollars he had raised from friends and forty thousand he had saved. To boost his returns, Jones borrowed heavily and bought stocks he liked “on margin”—a practice that had been discredited in the late nineteen-twenties. As a “hedge” against the market falling, Jones also picked out some stocks he believed to be overvalued and bet against them—a practice known as “selling short.” Jones’s fund regularly beat the Dow, and by the late nineteen-sixties it had attracted many imitators. *** ### Low tax rate for hedge fund managers > Worldwide, there are now some ten thousand hedge funds, which the government regulates only loosely. Together, they have about two trillion dollars under management. Even today, they employ the two basic tools that [[Alfred Winslow Jones]] used—borrowing (“[[leverage]]”) and selling short—and they charge their clients hefty fees, as Jones did. On top of a two-per-cent management fee, they deduct twenty per cent of any investment gains they generate. Jones claimed that this remuneration scheme, which is known as “two and twenty,” was inspired by the way ancient [[Phoenician]] merchants financed their trading expeditions. But the practice is also tax-driven. **It allows hedge-fund managers to classify much of their income as capital gains, which are [[tax]]ed at a far lower rate than regular income. While cops and schoolteachers face a marginal tax rate of twenty-five per cent, hedge-fund managers like [[Ray Dalio]] have for years paid fifteen per cent on the lion’s share of their income.** *** ### Much of the money in Bridgewater Associate's funds are from institutions > Part of [[Ray Dalio]]’s innovation has been to build a hedge fund that caters principally to institutional investors rather than to rich individuals. Of the roughly one hundred billion dollars invested in [[Bridgewater Associate]], only a small proportion comes from wealthy families. Almost a third comes from public pension funds, such as the Pennsylvania Public School Employees’ Retirement System; another third comes from corporate pension funds, such as those at Kodak and General Motors; a quarter comes from government-run sovereign wealth funds... I always find it interesting why so many institutional investors use hedge funds over an [[Index fund]]. I'm sure there's a reason. Maybe they want to diversify due to the simply huge amount of money they have? But I don't really see how an index fund doesn't do that. I think it's because the people running things like pension funds are cut of the same cloth as the people who run hedge funds. They're a group of people who think they can beat the market due to their cleverness. ***