Review: The Fund, by Rob Copeland

[Russ Allbery]

The Fund
by Rob Copeland

Publisher: St. Martin's Press
Copyright: 2023
ISBN:      1-250-27694-2
Format:    Kindle
Pages:     310

I first became aware of Ray Dalio when either he or his publisher
plastered advertisements for The Principles all over the San Francisco
4th and King Caltrain station. If I recall correctly, there were also
constant radio commercials; it was a whole thing in 2017. My brain is
very good at tuning out advertisements, so my only thought at the time
was "some business guy wrote a self-help book." I think I vaguely
assumed he was a CEO of some traditional business, since that's usually
who writes heavily marketed books like this. I did not connect him with
hedge funds or Bridgewater, which I have a bad habit of confusing with
Blackwater.

The Principles turns out to be more of a laundered cult manual than a
self-help book. And therein lies a story.

Rob Copeland is currently with The New York Times, but for many years
he was the hedge fund reporter for The Wall Street Journal. He covered,
among other things, Bridgewater Associates, the enormous hedge fund
founded by Ray Dalio. The Fund is a biography of Ray Dalio and a
history of Bridgewater from its founding as a vehicle for Dalio's
advising business until 2022 when Dalio, after multiple false starts
and title shuffles, finally retired from running the company. (Maybe.
Based on the history recounted here, it wouldn't surprise me if he was
back at the helm by the time you read this.)

It is one of the wildest, creepiest, and most abusive business
histories that I have ever read.

It's probably worth mentioning, as Copeland does explicitly, that Ray
Dalio and Bridgewater hate this book and claim it's a pack of lies.
Copeland includes some of their denials (and many non-denials that
sound as good as confirmations to me) in footnotes that I found
increasingly amusing.

  A lawyer for Dalio said he "treated all employees equally, giving
  people at all levels the same respect and extending them the same
  perks."

Uh-huh.

Anyway, I personally know nothing about Bridgewater other than what I
learned here and the occasional mention in Matt Levine's newsletter
(which is where I got the recommendation for this book). I have no
independent information whether anything Copeland describes here is
true, but Copeland provides the typical extensive list of notes and
sourcing one expects in a book like this, and Levine's comments
indicated it's generally consistent with Bridgewater's industry
reputation. I think this book is true, but since the clear implication
is that the world's largest hedge fund was primarily a deranged cult
whose employees mostly spied on and rated each other rather than doing
any real investment work, I also have questions, not all of which
Copeland answers to my satisfaction. But more on that later.

The center of this book are the Principles. These were an ever-changing
list of rules and maxims for how people should conduct themselves
within Bridgewater. Per Copeland, although Dalio later published a book
by that name, the version of the Principles that made it into the book
was sanitized and significantly edited down from the version used
inside the company. Dalio was constantly adding new ones and sometimes
changing them, but the common theme was radical, confrontational
"honesty": never being silent about problems, confronting people
directly about anything that they did wrong, and telling people all of
their faults so that they could "know themselves better."

If this sounds like textbook abusive behavior, you have the right idea.
This part Dalio admits to openly, describing Bridgewater as a firm that
isn't for everyone but that achieves great results because of this
culture. But the uncomfortably confrontational vibes are only the tip
of the iceberg of dysfunction. Here are just a few of the ways this
played out according to Copeland:

  * Dalio decided that everyone's opinions should be weighted by the
    accuracy of their previous decisions, to create a "meritocracy,"
    and therefore hired people to build a social credit system in which
    people could use an app to constantly rate all of their co-workers.
    This almost immediately devolved into out-group bullying worthy of
    a high school, with employees hurriedly down-rating and ostracizing
    any co-worker that Dalio down-rated.

  * When an early version of the system uncovered two employees at
    Bridgewater with more credibility than Dalio, Dalio had the system
    rigged to ensure that he always had the highest ratings and was not
    affected by other people's ratings.

  * Dalio became so obsessed with the principle of confronting problems
    that he created a centralized log of problems at Bridgewater and
    required employees find and report a quota of ten or twenty new
    issues every week or have their bonus docked. He would then
    regularly pick some issue out of the issue log, no matter how
    petty, and treat it like a referendum on the worth of the person
    responsible for the issue.

  * Dalio's favorite way of dealing with a problem was to put someone
    on trial. This involved extensive investigations followed by a
    meeting where Dalio would berate the person and harshly catalog
    their flaws, often reducing them to tears or panic attacks, while
    smugly insisting that having an emotional reaction to criticism was
    a personality flaw. These meetings were then filmed and added to a
    library available to all Bridgewater employees, often edited to
    remove Dalio's personal abuse and to make the emotional reaction of
    the target look disproportionate. The ones Dalio liked the best
    were shown to all new employees as part of their training in the
    Principles.

  * One of the best ways to gain institutional power in Bridgewater was
    to become sycophantically obsessed with the Principles and to be an
    eager participant in Dalio's trials. The highest levels of
    Bridgewater featured constant jockeying for power, often by trying
    to catch rivals in violations of the Principles so that they would
    be put on trial.

In one of the common and all-too-disturbing connections between Wall
Street finance and the United States' dysfunctional government, James
Comey (yes, that James Comey) ran internal security for Bridgewater for
three years, meaning that he was the one who pulled evidence from
surveillance cameras for Dalio to use to confront employees during his
trials.

In case the cult vibes weren't strong enough already, Bridgewater
developed its own idiosyncratic language worthy of Scientology. The
trials were called "probings," firing someone was called "sorting"
them, and rating them was called "dotting," among many other
Bridgewater-specific terms. Needless to say, no one ever probed Dalio
himself. You will also be completely unsurprised to learn that Copeland
documents instances of sexual harassment and discrimination at
Bridgewater, including some by Dalio himself, although that seems to be
a relatively small part of the overall dysfunction. Dalio was happy to
publicly humiliate anyone regardless of gender.

If you're like me, at this point you're probably wondering how
Bridgewater continued operating for so long in this environment. (Per
Copeland, since Dalio's retirement in 2022, Bridgewater has drastically
reduced the cult-like behaviors, deleted its archive of probings, and
de-emphasized the Principles.) It was not actually a religious cult; it
was a hedge fund that has to provide investment services to huge,
sophisticated clients, and by all accounts it's a very successful one.
Why did this bizarre nightmare of a workplace not interfere with
Bridgewater's business?

This, I think, is the weakest part of this book. Copeland makes a few
gestures at answering this question, but none of them are very
satisfying.

First, it's clear from Copeland's account that almost none of the
employees of Bridgewater had any control over Bridgewater's
investments. Nearly everyone was working on other parts of the business
(sales, investor relations) or on cult-related obsessions. Investment
decisions (largely incorporated into algorithms) were made by a tiny
core of people and often by Dalio himself. Bridgewater also appears to
not trade frequently, unlike some other hedge funds, meaning that they
probably stay clear of the more labor-intensive high-frequency parts of
the business.

Second, Bridgewater took off as a hedge fund just before the hedge fund
boom in the 1990s. It transformed from Dalio's personal consulting
business and investment newsletter to a hedge fund in 1990 (with an
earlier investment from the World Bank in 1987), and the 1990s were a
very good decade for hedge funds. Bridgewater, in part due to Dalio's
connections and effective marketing via his newsletter, became one of
the largest hedge funds in the world, which gave it a sort of
institutional momentum. No one was questioned for putting money into
Bridgewater even in years when it did poorly compared to its rivals.

Third, Dalio used the tried and true method of getting free publicity
from the financial press: constantly predict an upcoming downturn, and
aggressively take credit whenever you were right. From nearly the start
of his career, Dalio predicted economic downturns year after year.
Bridgewater did very well in the 2000 to 2003 downturn, and again
during the 2008 financial crisis. Dalio aggressively takes credit for
predicting both of those downturns and positioning Bridgewater
correctly going into them. This is correct; what he avoids mentioning
is that he also predicted downturns in every other year, the majority
of which never happened.

These points together create a bit of an answer, but they don't feel
like the whole picture and Copeland doesn't connect the pieces. It
seems possible that Dalio may simply be good at investing; he reads
obsessively and clearly enjoys thinking about markets, and being an
abusive cult leader doesn't take up all of his time. It's also true
that to some extent hedge funds are semi-free money machines, in that
once you have a sufficient quantity of money and political connections
you gain access to investment opportunities and mechanisms that are
very likely to make money and that the typical investor simply cannot
access. Dalio is clearly good at making personal connections, and
invested a lot of effort into forming close ties with tricky clients
such as pools of Chinese money.

Perhaps the most compelling explanation isn't mentioned directly in
this book but instead comes from Matt Levine. Bridgewater touts its
algorithmic trading over humans making individual trades, and there is
some reason to believe that consistently applying an algorithm without
regard to human emotion is a solid trading strategy in at least some
investment areas. Levine has asked in his newsletter, tongue firmly in
cheek, whether the bizarre cult-like behavior and constant infighting
is a strategy to distract all the humans and keep them from messing
with the algorithm and thus making bad decisions.

Copeland leaves this question unsettled. Instead, one comes away from
this book with a clear vision of the most dysfunctional workplace I
have ever heard of, and an endless litany of bizarre events each more
astonishing than the last. If you like watching train wrecks, this is
the book for you. The only drawback is that, unlike other entries in
this genre such as Bad Blood or Billion Dollar Loser, Bridgewater is a
wildly successful company, so you don't get the schadenfreude of seeing
a house of cards collapse. You do, however, get a helpful mental model
to apply to the next person who tries to talk to you about "radical
honesty" and "idea meritocracy."

The flaw in this book is that the existence of an organization like
Bridgewater is pointing to systematic flaws in how our society works,
which Copeland is largely uninterested in interrogating. "How could
this have happened?" is a rather large question to leave unanswered.
The sheer outrageousness of Dalio's behavior also gets a bit tiring by
the end of the book, when you've seen the patterns and are hearing
about the fourth variation. But this is still an astonishing book, and
a worthy entry in the genre of capitalism disasters.

Rating: 7 out of 10

Reviewed: 2024-02-24

URL: https://www.eyrie.org/~eagle/reviews/books/1-250-27694-2.html

-- 
Russ Allbery (eagle at eyrie.org)             <https://www.eyrie.org/~eagle/>