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The World’s Largest Hedge Fund Is Building an Algorithmic Model From its Employees’ Brains - WSJ
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The World’s Largest Hedge Fund Is Building an Algorithmic Model From its Employees’ Brains

Bridgewater wants day-to-day management—hiring, firing, decision-making—to be guided by software that doles out instructions

Ray Dalio, founder of Bridgewater hedge fund
Ray Dalio, founder of Bridgewater hedge fund Photo: Matt Furman

Deep inside Bridgewater Associates LP, the world’s largest hedge-fund firm, software engineers are at work on a secret project that founder Ray Dalio has sometimes called “The Book of the Future.”

The goal is technology that would automate most of the firm’s management. It would represent a culmination of Mr. Dalio’s life work to build Bridgewater into an altar to radical openness—and a place that can endure without him.

At Bridgewater, most meetings are recorded, employees are expected to criticize one another continually, people are subject to frequent probes of their weaknesses, and personal performance is assessed on a host of data points, all under Mr. Dalio’s gaze.

Bridgewater’s new technology would enshrine his unorthodox management approach in a software system. It could dole out GPS-style directions for how staff members should spend every aspect of their days, down to whether an employee should make a particular phone call.

The system remains under development, and the exact details of its operations are still being debated inside the firm. One employee familiar with the project described it as “like trying to make Ray’s brain into a computer.”

Bridgewater manages $160 billion, the most of any hedge-fund firm. It has earned clients twice as much total profit as any rival, says LCH Investments NV, a firm that puts client money into hedge funds. Mr. Dalio personally earned $1.4 billion last year, according to research firm Institutional Investor’s Alpha.

Bridgewater’s flagship fund, however, was down about 12% on the year at one point in 2016, causing alarm inside the firm. The fund has since recovered to being up 3.9% in mid-December. A lower-fee fund was up 8.1%.

Rules for Bridgewater’s staff are laid out in a 123-page public manifesto known as the “Principles,” which every employee is expected to know and diligently apply. Along with maxims such as “By and large, you will get what you deserve over time,” the Principles are filled with advice from Mr. Dalio such as “Don’t ‘pick your battles.’ Fight them all.”

Bridgewater says about one-fifth of new hires leave within the first year. The pressure is such that those who stay sometimes are seen crying in the bathrooms, said five current and former staff members. This article is based on interviews with them and more than a dozen other past and present Bridgewater employees and others close to the firm.

Mr. Dalio returned to run Bridgewater earlier this year after stepping back to a mentor role six years ago. Within a few weeks, he gathered managers under a tent and said the firm had grown bloated and inefficient. The fix, he said, would be a “renovation,” in which weak employees were let go.

Staff cuts began almost immediately. Since his return, head count is down by about 150, or 10%. Hundreds more may be cut in coming months, though some are expected to be replaced eventually. The budget for the holiday party, which in the past has had elaborate decorations, such as Christmas trees hanging inverted from the ceiling, has been trimmed by 20% this year.

Stung by public disclosures early this year of internal tumult, Mr. Dalio changed a decades-old system of making all high-level deliberations and decisions known to every member of staff. Instead, he decided to let only around 10% have the full measure of what he calls “radical transparency.”

He wrote a new principle, not yet public, that says, “Expect those who receive the radical transparency to handle it responsibly and don’t give it to them if they can’t.”

Greg Jensen, Bridgewater co-chief investment officer, got into a spat with Mr. Dalio about a year ago.
Greg Jensen, Bridgewater co-chief investment officer, got into a spat with Mr. Dalio about a year ago. Photo: Simon Dawson/Bloomberg News

When an employee challenged Mr. Dalio in an open meeting on whether the response was proportionate to the leaks, he replied that as the inventor of the firm’s management system, he determined it was.

Mr. Dalio founded Bridgewater in 1975 as a research shop based in his two-bedroom Manhattan apartment. He earned attention for his ability to predict macroeconomic trends.

The underpinning to his success, Mr. Dalio often says, is his belief that markets reflect the workings of a misunderstood economic machine, and interpreting its mechanics requires a relentless and often painful dedication to getting to the truth through “thoughtful disagreement.” That’s why employees are encouraged to challenge each other repeatedly and without reservation.

The economy, Mr. Dalio has written, is “really just a zillion simple things working together.” Decades before computer-driven trading came into vogue, Bridgewater began tracking relations among what are now 100 million separate data points, such as international interest rates and retail sales, and creating investment algorithms.

The main hedge fund embodying these algorithms, Pure Alpha, uses the data to buy and sell stocks, bonds, currencies and other assets. The fund has long anticipated booms and busts around the world, including the looming financial crisis as early as 2006, the firm has told investors.

Mr. Dalio also believes humans work like machines, a word that appears 84 times in the Principles. The problem, he has often said, is that people are prevented from achieving their best performance by emotional interference. It is something he thinks can be overcome through systematic practice.

That applies to managing, too. Successful managers “design a ‘machine’ consisting of the right people doing the right things to get what they want,” he wrote in the Principles.

James Comey, now FBI director, left a post as Bridgewater general counsel, telling colleagues his personality didn’t fit.
James Comey, now FBI director, left a post as Bridgewater general counsel, telling colleagues his personality didn’t fit. Photo: Andrew Harrer/Bloomberg News

The “Book of the Future” software to automate management, a project Mr. Dalio has also sometimes referred to as “The One Thing,” later gained the more formal name of Principles Operating System. Abbreviated PriOS, it is an attempt to make management nearly as systematic as the firm’s investing process.

Data are incorporated from a phalanx of personality tests that Mr. Dalio requires of his employees. In one, managers undergo written exams to determine their “stratum,” an unconventional score for conceptual skills developed by the late Canadian-born psychoanalyst Elliott Jaques.

As applied at the firm, questions include “What is the biggest problem Bridgewater faces today?” The highest marks go to those found to have an innate ability to spot long-term trends.

Mr. Dalio has the highest stratum score at Bridgewater, and the firm has told employees he has one of the highest in the world.

Likewise, Bridgewater’s software judges Mr. Dalio the firm’s most “believable” employee in matters such as investing and leadership, which means his opinions carry more weight.

Mr. Dalio is always in search of new data with which to measure his staff. He once raised the idea of using head bands to track people’s brain waves, according to one former employee. The idea wasn’t adopted.

The push to automate management addresses a larger challenge, which is how this culture would survive without Mr. Dalio, who is 67 years old.

When he temporarily retreated from day-to-day management, Mr. Dalio spent weeks at a time away from the firm’s Westport, Conn., campus indulging pursuits such as scuba diving and, until he gave it up, bow hunting. He bought a submarine-equipped yacht, MV Alucia, for research expeditions in the open ocean.

To run Bridgewater in his absence, he brought in a collection of big-name outsiders.

Before long, he was expressing frustration with some in senior roles. There was James Comey, whom Mr. Dalio hired as general counsel in 2010, saying he would act as a “godfather” figure to improve justice at the firm.

Within three years, according to two former employees, Mr. Dalio had taken to calling Mr. Comey something else, a “chirper” who repeats stale ideas, as opposed to a “shaper,” the Bridgewater ideal of a visionary leader.

Mr. Comey left in 2013, telling colleagues his personality didn’t fit. Now director of the Federal Bureau of Investigation, he declined to comment.

An executive long seen as Mr. Dalio’s heir apparent, Greg Jensen, ran afoul of his boss a year ago for allegedly talking about him beyond his back, which at Bridgewater is a sin second only to dishonesty. In a tribunal the firm convened, Mr. Jensen was found to have broken the rules. He lost his co-CEO title but remains co-chief investment officer. Mr. Jensen declined to comment.

David Ferrucci led IBM’s Watson artificial-intelligence project and now heads a lab at Bridgewater that is developing software to automate decision-making.
David Ferrucci led IBM’s Watson artificial-intelligence project and now heads a lab at Bridgewater that is developing software to automate decision-making. Photo: Bloomberg

“These types of interactions go on in any workplace in America,” Bridgewater said in a written statement for this article. “The difference here is that instead of pretending it doesn’t exist we address it openly and deal with it honestly. We show them to everyone and if necessary conflicts are decided by a vote.”

Mr. Dalio frequently develops new ways to enforce his philosophy. He recently created a job category called Overseer, whose roughly dozen members are spread through the firm and act as the eyes and ears of the top leadership.

At the core of the technology project now under way is a walled-off group called the Systematized Intelligence Lab, headed by David Ferrucci, who led development of the artificial-intelligence system Watson at International Business Machines Corp. before joining Bridgewater in 2013.

Though outsiders expected Mr. Ferrucci would use his talents to help find hidden signals in the financial markets, his job has focused more narrowly on analyzing the torrent of data the firm gathers about its employees. The data include ratings employees give each other throughout the work day, called “dots.”

The Systematized Intelligence Lab is involved in several iPad applications that are part of employees’ everyday lives, among them the “Dot Collector.” It allows employees to rate each other on dozens of attributes and to hold snap polls on issues during meetings, including asking blunt questions such as whether a current conversation is a waste of time.

The data blend with others to produce “Baseball Cards” that show people’s strengths and weaknesses in various categories, such as “touching the nerve,” a prized attribute.

A job advertisement for the Systematized Intelligence Lab said it sought to “extract meaning and domain understanding from the wealth of text-based data our innovative applications generate.” Several employees said they have felt that working at Bridgewater was as much experimental research into human decision-making as it was investing.

New apps in recent months shed light on Mr. Dalio’s expanding technological vision. Software called “The Contract,” loaded on staff iPads, instructs employees to formalize goals to be achieved over time and tracks how reliably they follow through.

An app called “The Coach” lets people input a question and directs them to the relevant passage in Mr. Dalio’s Principles document. The goal is an evolution of The Coach into an intelligent system that can assist in decision-making.

Those are initial uses of PriOS, the management software Mr. Dalio is developing. Future uses would include the ability to scan open positions at the company and have PriOS sort through the staff to find people with particular talents and strengths to fill jobs.

In other instances, employees at loggerheads over decisions wouldn’t have to hash out each debate out loud. They would key their opinions into PriOS, and the software would rank their perspectives, consult with Mr. Dalio’s Principles, and spit out the best way to proceed.

The ultimate vision is that PriOS would be able to predict outcomes of meetings before they are completed, and to guide people to take certain actions throughout the day. Within five years, Mr. Dalio aims for nearly three-quarters of management decisions to be determined by PriOS.

The role of many remaining humans at the firm wouldn’t be to make individual choices but to design the criteria by which the system makes decisions, intervening when something isn’t working.

Mr. Dalio’s original written manifesto nods to the goal of automating decision-making. With greater use of the Principles, it says, “not only will they be understood, but they will evolve from ‘Ray’s principles’ to ‘our principles’ and Ray will fade out of the picture.”

Write to Rob Copeland at rob.copeland@wsj.com and Bradley Hope at bradley.hope@wsj.com

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