Ray Dalio has been called "Wall Street's Oddest Duck" for his highly unusual approach to management, but no one has ever questioned his brilliance.

He turned his company Bridgewater Associates into the world's largest hedge fund, with $160 billion in assets, and amassed a personal fortune estimated at around $15.2 billion.

Dalio runs Bridgewater according to the theory of "radical transparency," which means that all meetings and interviews are recorded and archived, and any level of employee is encouraged to criticize another if necessary. Every Bridgewater employee is given a copy of the 123-page manual he wrote on leadership.

It includes a section in which Dalio outlines the habits he believes took him from a lower-middle class childhood to one of the most powerful people in finance. We've summarized them below:

1. Working for himself and not just doing what others wanted him to do

Dalio writes that he hated school as a boy because he could not find practical applications for things he was forced to memorize. He decided that he wanted to be successful, requiring him to be motivated. And to be motivated, he had to work for himself.

He started delivering newspapers, mowing lawns, and caddying, and at the age of 12 he made his first investment in the stock market.

"All the work I ever did was just what I needed to do to get what I wanted. Since I always had the prerogative to not strive for what I wanted, I never felt forced to do anything," Dalio writes.

2. Coming up with the best independent opinions he could to advance his goals

When he started investing as a kid, he began cutting out coupons from issues of Fortune magazine that could be mailed in for annual reports for Fortune 500 companies. He gathered as many as possible and took an amateur shot at figuring out the market.

It's the same attitude he's taken toward managing his employees. At this point, he's used to Bridgewater being called cultish and weird, but he's consistently responded by saying that the employees who work there naturally fit into the firm's unique culture. And it's certainly been working for them.

3. Surrounding himself with smart people and learning from the way they thought

Dalio says that as a novice investor, he started the habit of asking the opinion of anyone he deemed a somewhat savvy investor — his stockbroker, the people he caddied for, and even his barber.

"I never cared much about others' conclusions — only for the reasoning that led to these conclusions," he writes. "That reasoning had to make sense to me. Through this process, I improved my chances of being right, and I learned a lot from a lot of great people."

4. Being wary of overconfidence and limiting exposure to high-risk situations

Dalio has grown Bridgewater so tremendously because he lowers his risk as much as possible before making a decision.

"Sometimes when I know that I don't know which way the coin is going to flip, I try to position myself so that it won't have an impact on me either way. In other words, I don't make an inadvertent bet. I try to limit my bets to the limited number of things I am confident in," he writes.

5. Reflecting on how he made decisions and figuring out why they led to either success or failure

A major portion of Dalio's manual is dedicated to decision-making and analysis of results. He says that learning to appreciate failure early on was very valuable for him:

I learned that each mistake was probably a reflection of something that I was (or others were) doing wrong, so if I could figure out what that was, I could learn how to be more effective. I learned that wrestling with my problems, mistakes, and weaknesses was the training that strengthened me. Also, I learned that it was the pain of this wrestling that made me and those around me appreciate our successes.

You can check out all 123 pages of Dalio's principles at Bridgewater's site.

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I was intrigued by this article on Yahoo Finance by Tony Robbins who cites his interview with Ray Dalio in his upcoming book.  I ordered the book despite the fact that the blurbs in the back struck me as outlandish.  For instance, the back cover says:

“Learn how you can apply a never-before-revealed investment strategy from the world’s largest hedge fund manager that has made money even when the markets crashed”.

And:

“Invest like the wealthy where you participate in market gains but are guaranteed to never lose when the market drops”.

Yes, my eyes are rolling.  But let’s explore this in more detail before we just shrug it off.

First, the “never-before-revealed” strategy is Ray Dalio’s All Weather strategy.  It’s most certainly been revealed and widely distributed to those who actually track this stuff so “never” revealed is obviously just catchy terminology. In fact, there are now several funds that claim to do some version of this approach.  But look at what Robbins actually recommends in the article based on Dalio’s thinking – it’s a 55% bonds, 30% stocks, 15% commodities portfolio.  So let’s assess this a bit.

First, this is not the actual All Weather portfolio.  Dalio has been known to use dozens and more non-correlating assets.  In fact, Dalio is on record saying that the key to the approach is finding 15 or more sources of non-correlated returns:

“If you have 15 or more good, uncorrelated return streams — the math of that is such that if you go from 1 to 2 uncorrelated return streams. That you will reduce your risk by about 80% at about 15. And there’s a certain math to it; there’s a certain structure to it.”

The Yahoo Finance portfolio has 3, maybe 4 drivers.  This portfolio is just cookie cutter stocks, bonds and commodities.  There’s really nothing fancy going on here at all.

Second, the All Weather portfolio utilizes leverage to achieve risk parity.  Therefore, it’s obvious that the Yahoo Finance portfolio is not using the same degree of strategic diversification that Dalio implements in the All Weather portfolio.

Third, this portfolio is just a bond heavy portfolio.  Robbins mentions how “astonished” he was by the “back-tested” results of the portfolio.  Well, of course a bond heavy portfolio will perform well during the greatest bond bull market of the last 100 years.  And as I often mention, this is one of the dangers of back-testing.  The idea that that future will necessarily look like the past is ludicrously misleading.  And yes, bonds will not come close to generating the types of returns in the coming 30 years that they have in the past 30 years.  You just need an ounce of common sense to know that.

I hate to rain on the parade here (not like it matters since the book is selling so well), but this is not a newly revealed approach and it most certainly will not “guarantee” that you make money in the future.  In fact, if I had a gun to my head I’d bet the ranch that this bond heavy portfolio with a commodity tilt generates sub-optimal returns going forward.  We know that because the math on the low bond yields and the negative real returns of commodities makes it a high probability bet.

So please be careful reading this – I know the allure of a market guru can be strong.  But this portfolio is not a true representation of Ray Dalio’s All Weather portfolio so don’t go running into this idea thinking that you’ve found some “guarantee” of high returns.  That said, I look forward to reading Tony’s book.  I am sure there are tons of valuable insights in the book.

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Ray Dalio, who runs the $150-billion hedge fund Bridgewater Associates, said that the firm records all its employees' conversations.

Dalio spoke about his firm's eccentric culture at the Dealbook Conference on Thursday.

Recording the conversations is part of the fund's culture of transparency, he explained. 

"So yes, everything is taped so that everybody can hear every conversation." 

The only conversations Bridgewater doesn't record might be related to a proprietary trade or a personal issue not related to the business, he added.

He explained that having recorded conversations means people won't have spin. They can express what they're thinking. He also believes it builds trust. 

"It's fantastic," he said. 

He also said that 35% of employees don't get through the first 18 months at Bridgewater. 

So hearing yourself speak probably is not for everyone.  

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Ray Dalio is warning that a dynamic capitalism is based on is crumbling.

Speaking at The New York Times Dealbook conference last week, the head of the hedge fund Bridgewater Associates said that what lies ahead could be a real challenge for central bankers and the global economy. 

But right now, we're in the good part of the economic cycle. 

"Now, I think it's a good environment," Dalio said. "We’re long equities and we're holding those positions and it's a relatively good time. What I worry about is if we were to take it a year or two in the future, what the effectiveness of monetary policy will be, particularly in a deflationary environment."

Now, when Dalio talks about a "deflationary environment" he is basically talking about this chart, highlighted by Gerard Minack back in our latest Most Important Charts feature:

The idea behind Minack's chart and Dalio's "deflationary environment" is that the peaks and troughs in interest rate cycles since 1980 have been falling steadily.

Those trends are headed toward zero. Then what?

Dalio, at least, is skeptical about how much more we can get out of our economic status quo.

"We are almost at the end of the ability to squeeze more out of it," Dalio said. And by "it," Dalio is talking about "spread," which is basically how much you are compensated for taking risks. 

"If you look at capitalism," Dalio said, "it's the spread that is the transmission mechanism: everybody's looking for spread. And it's that spread that makes lending go through.

"And then there's lowering interest rates, which lowers debt service payments. That dynamic that capitalism is based on is going to become decreasingly effective in the longer-term future."

And so the predicament facing central banks like the Federal Reserve, the European Central Bank, and the Bank of Japan is that interest rates have been at zero as credit spreads have narrowed.

For Dalio, this means that going forward, it will be harder for these central banks to enact effective policies because they can no longer use interest rates as a policy tool, and they may no longer be able to rely on the existence of "spread" in the economy.

As Dalio said: "I think it will be a big difference in the world economy."

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Billionaire Ray Dalio, the founder of hedge fund behemoth Bridgewater Associates, did a Q&A with Bill Ackman of Pershing Square.

Dalio manages $160 billion in assets. That's 8.5-times more than Ackman's Pershing Square Capital Management.

Ackman asked Dalio how does he manage that kind of AUM in this environment (low interest rates, Swiss lifting a peg, strong U.S. economy with no inflation, etc).

"Well, first of all, I think it's because I could be long and short anything in the world. I'm basically long in liquid stuff," he said. "And I can be short or long anything in the world, and I'm short or long practically everything. I don't have any bias, so I do it in a very, um, fundamental way, but um, very systematic, very um--we use a lot of artificial intelligence type of approaches to think about portfolio theory. I use a lot of financial engineering to basically take a whole bunch of uncorrelated bets..." 

He clarified later in the session that he has the ability to go long or short anything. 

Before he could really get into how he does it, Dalio turned the questions toward Ackman.

"I think about the macro environment in 2008...I think about how asset prices are so much higher now than they were where returns are so much lower than they were. And I wonder about how you [Bill Ackman] do it? Do you wonder about bear markets and how do you treat...how do you not deal with that macro then?" 

Ackman called that an "interesting interviewee approach." 

Ackman, who was the best performing hedge fund manager in 2014, said that he likes to look for a handful of quality businesses that can withstand macro factors such as interest rates moving up and down and commodity prices moving. He also looks for businesses that haven't been run well, so he can intervene and make changes from a management level and unlock value. 

"I thought I was interviewing him?" Ackman said after Dalio tried to ask another question. 

Ackman explained that he owns ten positions. 

Dalio, on the other hand, said that he has a number of long and short positions that they snapped up after running them through different screens/criteria. 

Dalio pointed out that he and Ackman "live in very different worlds." 

"You use artificial intelligence. Hopefully, I use natural intelligence," Ackman joked. 

Dalio went on to explain that in this low interest rate environment asset prices have risen. He thinks that central banks won't  have the ability to ease when it comes to monetary policy. 

"So when we think about a 2008, a 2008 could happen again...When I think about my job, which is, you're finding good value and when I think about that, say when I try to find the good value my own way, but when I'm also thinking about those macro influences, they can change. So I just was curious when we exchanged thoughts. I'm not trying to say one approach is better than the other. As we wrestle with the question, I would be worried over the next three years let's say that you could see a situation where you had a downturn in the economy... I wonder then how do we approach our games? How does it feel to be long only?" 

"We're not long-only," Ackman responded. 

The conversation shifted back to how Dalio constructs his portfolio. Dalio said that he invests in 120 different markets. 

"You're asking me how I make money. I take the bets that are logical...the only thing I would do different is I take that I write that rule down. I test that rule over all different environments... I stress test it." 

"I invest exactly the opposite of that," Ackman said. Ackman is short Herbalife. He also has an undisclosed short that's a hedge, Business Insider has learned. 

"So you have your criteria, my criteria is very similar to yours," Dalio said. "It was beautiful to hear how you choose the management--that whole description. You could write that rule down--what makes you buy or sell a company? Here are my criteria, those screens, and I imagine that I apply those screens through history...So you can go back in history and you doing it your way, you would know the track record of each decision rule. Now you have a framework." 

Dalio said he picks uncorrelated bets. 

Ackman asked him how he knows they're not correlated. 

"Fundamentally, you know, just the same way you would know something is different from something else. In other words, not by looking at correlation. Correlation is an outcome, not a thing in and of itself." 

Ackman then asked Dalio about how he thinks about risk. 

Dalio said that looking at "risk of ruin" (a risk of not being able to come back) is the most important as is thinking of tailrisks.

"I'm terrified. I'm a very risk averse investor. And so I think about each of these individual tailrisks and risk of ruin, and I'm so scared that by being able to have a whole lot of uncorrelated bets I gain my comfort." 

Bridgewater Associates 1500 people. About 300 are involved in the investment process in some way, Dalio said.

He said they have teams and different markets that they follow. They have a lead on the team and programers. He said that they spend a lo tof time thinking about the criteria (decision rules). 

"They're not thinking as much about individual trades as much as they are thinking about criteria," Dalio said. "What we do is a lot of research to reflect on those criteria and do what I've described before in that systematic process. That's what we do in teams in different markets." 

He said that the teams go through and test if the rules work in 

"The same things happen over and over again in history. The problem that I've learned about that is we are very much biased by our own experiences," Dalio said. "So what I learned over the years... that everything that surprised me and cost me money were things that hadn't happened in my lifetime before, but I learned that they happened in other peoples' lifetimes." 

Ackman said that he couldn't invest the way Dalio does. He said he's much more qualitative.

Dalio went on to explain that Ackman could do it.

"How did you choose your wife?" Ackman joked.

"Passion." 

"Did you quantify it?" Ackman asked.

"Thought about it," Dalio said.

"Is she a computer?" Ackman joked. 

Dalio continued and said that you can quantify people. He said he's given personality tests to people. Through questions and answers you can learn an enormous amount about those people and convert that to data, Dalio explained.

"My only point that I'm trying to convey is that as we look at people...there's more than we can imagine that's quantifiable," Dalio said. "The computer can process more than we have the capacity. It doesn't have the intuition. You have the intuition."

Dalio said that there are many ways of playing the market.  He complimented Ackman on his success and said he's "fantastic." 

Ackman asked Dalio how many bets he makes and how long the duration is. 

He said the average holding period is six to eighteen months. As for the number of bets he makes, Dalio said the "best way to describe it is a little over 100." 

Ackman asked Dalio about how much of what he does is judgment and how much is experience.

Dalio said 99% of what they do is systematic judgment. 

"They're my criteria, so I'm very comfortable," Dalio said. 

Ackman asked him where he would put his money. After all, the Harbor Investment Conference is an event where investors share trade ideas while raising money for the Boys & Girls' Harbor.

"Let's say you were to buy one asset, or one stock, or one market, or one currency."

"I don't do that," Dalio responded. 

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Ray Dalio is distinguished not only for founding Bridgewater Associates— the world's biggest hedge fund — or by his estimated net worth of $15 billion, but by his unique business philosophy and his tendency to explain it at length.

Every Bridgewater employee, for example, is given an exhaustive 120-page manual on Dalio's world view.

In late 2013, he produced and narrated an animated video that explains "How the Economic Machine Works" that simplifies the economy as the interaction of short- and long-term debt cycles over a productivity growth line. It's since gotten over 1 million views.

It's an engaging, animated explainer that covers the basics: the relationship between cash and credit, the government and the central bank, and inflation and deflation within 30 minutes. It's a great primer for anyone who could afford to be more financially savvy.

Here are some key points:

The economy is simply the sum of all transactions — the exchange of money and credit for goods, services, and financial assets — among individuals, banks, and governments.

The x-axis on the chart below roughly represents 75-100 years. The straight line is productivity growth, which doesn't fluctuate much. The large curves represent the long-term debt cycle and the smaller curves represent the short-term debt cycle, in which one curve represents 5-8 years.

An individual's spending is another person's income. If, for a hypothetical example, someone without debt makes $100,000, and they're eligible for a $10,000 line of credit, they can spend $110,000 that year, which is what someone else is making in cash.When spending outpaces the quantity of goods, prices rise. This represents inflation, the ascending half of the curves in the short-term debt cycle.To curb inflation, the central bank raises interest rates, which means that fewer people can afford to borrow money and existing debts grow more quickly. On a large scale, less spending means people's incomes drop and prices go down, and this is deflation. The central bank can lower interest rates to kick things up again.

The bottom and top of each short-term debt cycle finish with more growth and more debt than the previous one because people are inclined to borrow and spend more rather than paying off debt.

This leads to the top of the long-term debt cycle, called a bubble. As incomes and assets rise, borrowing increases. When the debt repayment grows faster than spending, incomes begin to go down, which then makes people less credit worthy. The cycle reverse itself.

In this process, a deleveraging, people cut spending, incomes fall, the stock market crashes, credit disappears, assets drop, banks are squeezed, and social tensions rise. The central bank can't lower interest rates any further because they're at 0%

To recover, people cut spending, banks reduce debt through defaults, the government redistributes wealth through higher taxes on the rich and social welfare programs for the poor, and the central bank prints money. If done effectively, a deleveraging can be "beautiful" rather than a total disaster.

Check out the full video below:

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The world's largest hedge fund, Bridgewater Associates, is almost ready to launch a new artificial intelligence team, Bloomberg reports.

Billionaire Ray Dalio's hedge fund manages $160 billion in assets, which to put in perspective, is 8.5 times more than that managed by Bill Ackman's Pershing Square Capital Management.

Dalio told Ackman at the Harbor Investment Conference earlier this month that AI already factors into Bridgewater's investment strategy. He explained:

I can be short or long anything in the world, and I'm short or long practically everything. I don't have any bias, so I do it in a very fundamental way... we use a lot of artificial intelligence type of approaches to think about portfolio theory. I use a lot of financial engineering to basically take a whole bunch of uncorrelated bets...

Bloomberg reports that a source close to the matter says the new AI team will launch next month with about six employees led by senior technologist Dave Ferrucci, quietly hired from IBM in late 2012.

Ferrucci gained recognition as the lead researcher of Watson, the AI engine that became a "Jeopardy" champion.

Ferrucci told the New York Times in 2013 that before leaving IBM, he was working on WatsonPaths, which took a different direction from the traditional Big Data approach.

"The Big Data formula, he noted, has proved to be 'incredibly powerful' for tasks like natural-language processing — a central technology behind Google search, for instance," the Times wrote. "WatsonPaths, by contrast, builds step-by-step graphs, or paths, that trace possible causes rather than mere statistical correlations."

It's the approach Bridgewater hired him for to stay on top.

"Machine learning is the new wave of investing for the next 20 years and the smart players are focusing on it," Gustavo Dolfino, CEO of recruitment firm WhiteRock Group told Bloomberg. Investment firms like Two Sigma Investments and Renaissance Technologies have been expanding their AI teams in recent months.

It also works with Dalio's management philosophy, which he describes in the 120-page manual he gives to every Bridgewater employee. Dalio writes that a manager should see their team as an autonomous "machine" whose function is to achieve its manager's goals.

A Bridgewater representative told Business Insider that the hedge fund is not ready to comment but will update us if that changes.

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A month or so ago, I was struck by Ray Dalio’s comments at Davos. He seemed fairly concerned and the major media outlets didn’t really pick it up.

“It’s the end of the supercycle. It’s the end of the great debt cycle.” -Ray Dalio

What does this mean? I think the simplest explanation is that over the past several decades we’ve gone from a nation of savers who paid cash for things including homes and cars to a nation of spenders who use debt like mortgages, car loans and credit cards to pay for things.

And it’s not just on the consumer level. It’s also happened at the corporate level.

“Corporate debt was $3.5 trillion– in 2007, arguably a period and– many would describe as bubbly. It’s 7 trillion now. So it’s gone from 3.5 trillion to 7 trillion. As you know, most of that mix has been in more highly leveraged stuff, Covenant-Lite loans– high yield, that’s where the majority of the rise has been. And if you look at corporations have been using it for, it’s all financial engineering.” -Stan Druckenmiller

Government debt has also grown to multiples of GDP around the world. But it can’t keep growing forever.

“In the past 20 to 30 years, credit has grown to such an extreme globally that debt levels and the ability to service that debt are at risk, relative to the private investment world. Why doesn’t the debt supercycle keep expanding? Because there are limits.” -Bill Gross

The debt boom over the past few decades has been a big economic stimulant. It reminds me of the steroids era in baseball. You take a great player, put him on the juice and he becomes a record-breaking home run machine.

But what happens when he comes off the juice? Have you seen a picture of Mark McGuire or Sammy Sosa lately? They are shadows of their former selves. Now that rates are zero and everyone has borrowed as much as they possibly can debt is no longer the super-stimulant it once was.

“The process of lowering interest rates causing higher levels of debt, debt service and spending, I think is coming to an end.” – Ray Dalio

The steroid era is over. So what are the implications for the economy and the markets?

“The implications are much lower growth, less inflation, lower interest rates, and less profit growth.” -Bill Gross

These are all symptoms that we’ve already witnessed since the financial crisis, right? Slower economic growth has been partially masked by rising asset prices and the wealth effect. Slower profit growth has been masked by the “financial engineering” Druck mentioned above. But that doesn’t change the fact that we are now facing a post-steroid era for the economy.

“We brought consumption forward and issued one giant credit card for the past 30 years. Now the bill is coming due. Investors need to get used to low returns, and low growth, inflation, and interest rates for a long time.” -Bill Gross

What’s probably most troublesome about the whole situation is that now that rates are zero or negative, debt levels have reached their maximum capacity and asset prices are already inflated (and spreads flattened), central banks no longer have the ability to ameliorate an economic slowdown by easing monetary policy.

“Central banks have largely lost their power to ease… We now have a situation in which we have largely no spreads and so as a result the transmission mechanism of monetary policy will be less effective. This is a big thing… So I worry on the downside ’cause the downside will come.” -Ray Dalio

With corporate debt levels twice what they were before the financial crisis, the covenants on much of that debt weaker than ever before and liquidity in the bond market disappearing, the next downturn could present a unique challenge for the Fed. And their traditional tool to address these sorts of challenges is now essentially impotent. No wonder Dalio is worried.

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To make money in the markets, you have to think independently and be humble. You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble.

Early in my career I learned this lesson the hard way — through some very painful bad bets. The biggest of these mistakes occurred in 1981–’82, when I became convinced that the U.S. economy was about to fall into a depression. My research had led me to believe that, with the Federal Reserve’s tight money policy and lots of debt outstanding, there would be a global wave of debt defaults, and if the Fed tried to handle it by printing money, inflation would accelerate. I was so certain that a depression was coming that I proclaimed it in newspaper columns, on TV, even in testimony to Congress. When Mexico defaulted on its debt in August 1982, I was sure I was right. Boy, was I wrong. What I’d considered improbable was exactly what happened: Fed chairman Paul Volcker’s move to lower interest rates and make money and credit available helped jump-start a bull market in stocks and the U.S. economy’s greatest ever noninflationary growth period.

This episode taught me the importance of always fearing being wrong, no matter how confident I am that I’m right. As a result, I began seeking out the smartest people I could find who disagreed with me so that I could understand their reasoning. Only after I fully grasped their points of view could I decide to reject or accept them. By doing this again and again over the years, not only have I increased my chances of being right, but I have also learned a huge amount.

There’s an art to this process of seeking out thoughtful disagreement. People who are successful at it realize that there is always some probability they might be wrong and that it’s worth the effort to consider what others are saying — not simply the others’ conclusions, but the reasoning behind them — to be assured that they aren’t making a mistake themselves. They approach disagreement with curiosity, not antagonism, and are what I call “open-minded and assertive at the same time.” This means that they possess the ability to calmly take in what other people are thinking rather than block it out, and to clearly lay out the reasons why they haven’t reached the same conclusion. They are able to listen carefully and objectively to the reasoning behind differing opinions.

When most people hear me describe this approach, they typically say, “No problem, I’m open-minded!” But what they really mean is that they’re open to being wrong. True open-mindedness is an entirely different mind-set. It is a process of being intensely worried about being wrong and asking questions instead of defending a position. It demands that you get over your ego-driven desire to have whatever answer you happen to have in your head be right. Instead, you need to actively question all of your opinions and seek out the reasoning behind alternative points of view.

This approach comes to life at Bridgewater in our weekly research meetings, in which our experts on various areas openly disagree with one another and explore the pros and cons of alternative views. This is the fastest way to get a good education and enhance decision-making. When everyone agrees and their reasoning makes sense to me, I’m usually in good shape to make a decision. When people continue to disagree and I can’t make sense of their reasoning, I know I need to ask more probing questions or get more triangulation from other experts before deciding.

I want to emphasize that following this process doesn’t mean blindly accepting the conclusions of others or adopting rule by referendum. Our CIOs are ultimately responsible for our investment decision-making. But we all make better decisions by maintaining an independent view and the conflicting possibilities in our minds simultaneously, and then trying to resolve the differences. We’re always in the place of holding an opinion and simultaneously stress-testing the hell out of it.

Operating this way just seems like common sense to me. After all, when two people disagree, logic demands that one of them must be wrong. Why wouldn’t you want to make sure that that person isn’t you?

Raymond Dalio is founder, chairman and co-CIO of Bridgewater Associates, the world’s largest hedge fund firm.

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In February, Bloomberg reported that Ray Dalio's Bridgewater Associates, the world's largest hedge fund with $160 billion in assets, was building a new artificial intelligence team under senior technologist Dave Ferucci. It was to launch this month.

The report seemed to offer even a small glimpse into Bridgewater's mysterious investment approach and where it was heading. 

However, a Bridgewater representative tells Business Insider that the hiring of Ferucci was misconstrued. Bridgewater has been developing AI since 1983.

Here's the full statement:

There has been a lot of speculation in the media, as well as some misunderstanding, about what Bridgewater is doing in the area of artificial intelligence, and with Dave Ferrucci. We felt it was important to clarify this.

Ever since 1983 Bridgewater Associates has been creating systematic decision-making processes that are computerized. We believe that the same things happen over and over again because of logical cause/effect relationships, and that by writing one’s principles down and then computerizing them one can have the computer make high-quality decisions in much the same way a GPS can be an effective guide to decision making.

Like using a GPS, one can choose to follow the guidance or not follow it depending on how it reconciles. It is through this never ending reconciliation process that the computer decision-making system constantly learns, and the learning compounds over time.

It is because Bridgewater and Dave Ferrucci both have long and deep commitments to this area that Dave has recently joined Bridgewater. It would be a mistake to think that this is a new undertaking for Bridgewater or that the process being used at Bridgewater is like some artificial intelligence systems that are based on data-mining rather than well-examined logic.

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NEW YORK (Reuters) - Bill Gross, the closely watched bond investor, on Wednesday said the portfolios he manages at Janus Capital Group Inc closely resemble the investment strategies of Bridgewater Associates, the world's largest hedge fund firm.

Gross, who runs the Janus Global Unconstrained Bond Fund, said in his latest Investment Outlook report: "Unconstrained portfolios at Janus mimic most closely the strategic philosophy at Bridgewater."

Unconstrained bond funds have become some of the most popular investment vehicles over the last year because they have the flexibility to invest in all types of bond securities globally and often invest in credit rather than interest-rate sensitive assets.

Bridgewater, with assets under management of about $169 billion and run by Ray Dalio, has used leverage to try to magnify returns on stocks, bonds and commodities.

"Cheap leverage is an alpha generating strategy as long as short rates stay low," Gross said. "Of course if an investor borrows short term to invest longer and riskier, the potential alpha necessarily demands choosing the correct assets to lever. The challenge is to purchase the ones that might remain artificially priced over one's investment horizon."

Gross said corporate credit spreads are too tight and therefore expensive. "Duration is more neutral but there is little to be gained from it in the U.S., Euroland, and the U.K. unless the global economy inches toward recession."

All told, Gross said the most attractive opportunity rests with the notion that Mario Draghi's 18-month Quantitative Easing program, which roughly purchases 200 percent of sovereign net new issuance during that time, will keep yields low in Germany and therefore anchor U.S. Treasuries and U.K. Gilts in the process.

"I would not buy these clearly overvalued assets but sell 'volatility' around them, such that much higher returns can be captured if say the German 10-year Bund at 20 basis points doesn't move to –.05 percent or up to .50 percent over three months' time."

(Reporting By Jennifer Ablan; Editing by Bernard Orr)

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Tony Robbins, the self-improvement titan and author of  "Money: Master the Game,"has advised the biggest names in finance, including Ray Dalio, Paul Tudor Jones and T. Boone Pickens. We sat down with him to find out what he learned from them.

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One of hedge fund billionaire Ray Dalio's strategies is up 14% year-to-date thanks to a bet against the euro, Bloomberg News' Kelly Bit reports, citing a source familiar with the fund's performance.

The euro fell to its lowest level in a decade during the first three months of 2015, ending the quarter down 11% against the US dollar.

Bridgewater Associates, the world's largest hedge fund, manages about $165 billion in assets. Earlier this year, Dalio explained that his fund makes numerous uncorrelated long/short bets in about 120 markets.

SEE ALSO: Here's Ray Dalio's attempt at explaining how he makes money

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Ray Dalio is the billionaire founder and co-chief investment officer of Bridgewater Associates, the world's largest hedge fund with about $169 billion in assets under management.

CNN's Fareed Zakaria recently asked Dalio what he thinks is responsible for his personal success.

Dalio said that he partially attributes his success to keeping in mind how history repeats itself, and learning what decisions didn't work.

This approach, he said, requires both "great humility" and "great fear" as protections against hubris.

"People think that my success is ... because of what I know," Dalio explained. "It's not. It's due more to how I deal with not knowing.

"In other words, how I go look for where I might be wrong... I love to find people who could disagree with me and see it through their eyes. Smart, believable people, and I can see it through their eyes and I can consider, 'Is that right? Is that wrong?'"

This Socratic approach helps him learn more and make better decisions.

"So it's the dealing with what one doesn't know that's what's more effective than knowing," he said.

SEE ALSO: Billionaire investor Ray Dalio's top 20 management principles

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Bridgewater Associates is the largest hedge fund in the world. 

It's also known for an intense corporate culture of radical truth and radical transparency. "I'm sure our reputation on the Street is that we're completely insane," one employee told New York Magazine's Kevin Roose back in 2011.

That reputation comes from the top. In his legendary manifesto, "Principles," Bridgewater founder Ray Dalio asks, among other things, that employees "humiliate themselves" in pursuit of truth, and he also compares the process of self-improvement to "when a pack of hyenas takes down a young wildebeest," Roose reports.

It's an understatement to say that Bridgewater Associates is not right for everyone. So how do they find the perfect young wildebeests ready for the job? That starts with a grueling interview process.

"We ask people questions that actually don't have a right or wrong answer, such as: Should there be a market for transplant organs?" Dalio tells Bloomberg. "The answer doesn't really matter. It's totally great if the person's thinking on the subject ends in a different place than the beginning, because moving forward together to get at the best answer is more important than being right from the outset."

We sifted through reports from Glassdoor to find some of the diciest, trickiest, and most intense interview questions Bridgewater could throw your way. Whether you're applying to be a summer associate or a manager (or you're just looking to spice up your conversation at dinner parties), here are a few questions worth mulling over in advance.

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"Are there any circumstances under which torture is justified?"— Facilities manager candidate

"Would you sell cigarettes to a smoker even if it was bad for them?"— Reporting associate candidate

"What could you not be relied on for?"— Business support associate candidate

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The Chinese stock market just lost another friend.

Bridgewater, which has $169 billion (£108 billion) under management and was one of the last bulls on China, is reversing its stance, according to a report in The Wall Street Journal.

“Our views about China have changed,” Bridgewater’s founder, Ray Dalio, told clients earlier this week, according to The Journal. “There are now no safe places to invest.”

He thinks the unraveling stock market will kill China's economic growth.

“Even those who haven’t lost money in stocks will be affected psychologically by events, and those effects will have a depressive effect on economic activity,” said Dalio.

Chinese stocks have lost 22% of their value from a high in June.

Official data shows the Chinese economy growing at 7%. But not everyone believes the numbers. Citigroup said in a note this week that China is inflating its figures and "in practice, 'genuine' GDP growth probably is below 5%."

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We got hold of Ray Dalio's note on China to Bridgewater Associates' clients, and it's way worse than everyone first thought. Bridgewater is the world's largest hedge fund, and it is advising its investors to get the heck out of China because “There are now no safe places to invest.”

This is the context, per Dalio: "because the forces on debt are coming from debt restructurings, economic restructurings, and real estate and stock market bubbles bursting all at the same time, we are now seeing mutually reinforcing negative forces on growth.” He estimates that those negative forces may wipe between 1.8% and 4% off China's GDP growth. (Given that some people believe that China's real GDP growth is already as low as 5%, that would be catastrophic.)

Here are the highlights:

1: Chinese households lost more money than anyone in recent memory.

Retail speculators lost the equivalent of about 1.3% of the country's GDP gambling on stock prices going up. The market went down — and hard — losing about 22% of its value in a month.

They lost more than their American counterparts did during the the tech and finance meltdowns of 2000 and 2008. COMBINED.

2. The dumb money was really dumb.

67% of retail investors had less than a high school education and were borrowing money to trade.

3. Big companies also got caught up in the bubble. 

According to the note, people who should have known better were also taking losses. Dalio says: "We did not properly anticipate the rate of acceleration in the bubble and the rate of unraveling, or realize that the speculation in the markets was so big by established corporate entities as well as the naive speculators."

4. Economic growth is usually terrible after an asset bubble pops

China is targeting 7% GDP growth but very few people believe they can hit that. Dalio just added his voice. The psychological effects of people losing money on the stock market can quickly translate into lower growth and consumer spending.

Dalio said: "We believe the that the stock market was in a bubble that burst, and the fact that this is coming on top of both the debt bubble bursting and the economy transitioning growth from sectors that cannot sustain their growth rates to other sectors is more reason for concern."

5. The Chinese government is trying too hard to prop up the market

The Bridgewater note estimates the Chinese government has spent RMB 380 billion propping up stocks, and has a total war chest of RMB 3.5 trillion at its disposal. While this helps things in the short term, in the medium and longer term it can hurt credibility among investors.

Here's Dalio summing it up: "History has shown that smart investors tend to sell when the government is artificially supporting prices and buy when they are liquidating positions."

And concluding: "I believe that China's policy makers have both considerable resources and skills and the willingness to manage it well, though the new development makes me less confident it can be managed without a painful economic slowdown along the way."

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Ray Dalio, founder of the $160 billion hedge fund behemoth Bridgewater Associates, thinks the Federal Reserve will do another round of quantitative easing.

Wall Street had expected the Fed to raise rates at its September 17 Federal Open Market Committee meeting, but some now expect it to wait until December, given the wild market moves of the past few days.

Dalio, however, thinks the Fed will head in a different direction altogether.

On Monday, he sent a note to clients titled "The Dangerous Long Bias and the End of the Supercycle and Why We Believe That the Next Big Fed Move Will Be to Ease (Via QE) Rather Than to Tighten."

It might seem like a bold call, but given what has happened in global equities in the past week, anything seems possible.

Business Insider obtained a copy of the email and has reached out to Bridgewater for comment.

Here is Dalio, with the last four paragraphs here being key:

As you know, the Fed and our templates for how the economic machine works are quite different so our views about what is happening and what should be done are quite different.

To us the economy works like a perpetual motion machine in which short-term interest rates are kept below the returns of other asset classes and the returns of other asset classes are more volatile (because they have longer duration) than cash. That relationship exists because a) central banks want interest rates to be lower than the returns that those who are borrowing to invest can generate from that borrowing in order to make their activities profitable and b) longer-term assets have more duration that makes them more volatile than cash, which is perceived as risk, and investors will demand higher returns for riskier assets.

Given that, let's now imagine how the machine works to affect debt, asset prices, and economic activity.

Because short-term interest rates are normally below the rates of return of longer-term assets, you'd expect people to borrow at the short-term interest rate and buy long-term assets to profit from the spread. That is what they do. These long-term assets might be businesses, the assets that make these businesses work well, equities, etc. People also borrow for consumption. Borrowing to buy is tempting because, over the short term, one can have more without a penalty and, because of the borrowing and buying, the assets bought tend to go up, which rewards the leveraged borrower. That fuels asset price appreciation and most economic activity. It also leads to the building of leveraged long positions.

Of course, if short-term interest rates were always lower than the returns of other asset classes (i.e., the spreads were always positive), everyone would run out and borrow cash and own higher returning assets to the maximum degree possible. So there are occasional "bad" periods when that is not the case, at which time both people with leveraged long positions and the economy do badly. Central banks typically determine when these bad periods occur, just as they determine when the good periods occur, by affecting the spreads. Typically they narrow the spreads (by raising interest rates) when the growth in demand is growing faster than the growth in capacity to satisfy it and the amount of unused capacity (e.g., the GDP gap) is tight (which they do to curtail inflation), and they widen the spreads when the opposite configuration exists, which causes cycles. That's what the Fed is now thinking of doing — i.e., raising interest rates based on how central banks classically manage the classic cycle. In our opinion, that is because they are paying too much attention to that cycle and not enough attention to secular forces.

As a result of these short-term (typically 5 to 8 year) expansions punctuated by years of less contraction, this leveraged long bias, along with asset prices and economic activity, increases in several steps forward for each step backwards. We call each step forward the expansion phase of each short-term debt cycle (or the expansion phase of each business cycle) and we call each step back the contraction phase of each short-term debt cycle (or the recession phase of the business cycle). In other words, because there are a few steps forward for every one step back, a long-term debt cycle results. Debts rise relative to incomes until they can't rise any more.

Interest rate declines help to extend the process because lower interest rates a) cause asset prices to rise because they lower the discount rate that future cash flows are discounted at, thus raising the present value of these assets, b) make it more affordable to borrow, and c) reduce the interest costs of servicing debt. For example, since 1981, every cyclical peak and every cyclical low in interest rates was lower than the one before it until short-term interest rates hit 0%, at which time credit growth couldn't be increased by lowering interest rates so central banks printed money and bought bonds, leading the sellers of those bonds to use the cash they received to buy assets that had higher expected returns, which drove those asset prices up and drove their expected returns down to levels that left the spreads relatively low.

That's where we find ourselves now — i.e., interest rates around the world are at or near 0%, spreads are relatively narrow (because asset prices have been pushed up) and debt levels are high. As a result, the ability of central banks to ease is limited, at a time when the risks are more on the downside than the upside and most people have a dangerous long bias. Said differently, the risks of the world being at or near the end of its long-term debt cycle are significant.

That is what we are most focused on. We believe that is more important than the cyclical influences that the Fed is apparently paying more attention to.

While we don't know if we have just passed the key turning point, we think that it should now be apparent that the risks of deflationary contractions are increasing relative to the risks of inflationary expansion because of these secular forces. These long-term debt cycle forces are clearly having big effects on China, oil producers, and emerging countries which are overly indebted in dollars and holding a huge amount of dollar assets — at the same time as the world is holding large leveraged long positions.

While, in our opinion, the Fed has over-emphasized the importance of the "cyclical" (i.e., the short-term debt/business cycle) and underweighted the importance of the "secular" (i.e., the long-term debt/supercycle), they will react to what happens. Our risk is that they could be so committed to their highly advertised tightening path that it will be difficult for them to change to a significantly easier path if that should be required.

Dalio added this update to the end of the letter:

To be clear, we are not saying that we don't believe that there will be a tightening before there is an easing. We are saying that we believe that there will be a big easing before a big tightening.  We don't consider a 25-50 basis point tightening to be a big tightening. Rather, it would be tied with the smallest tightening ever. As shown in the table below, the average tightening over the last century has been 4.4%, and the smallest was in 1936, 0.5%—  when the US was last going through a deleveraging phase of the long term debt cycle. The smallest tightening since WWII was 2.8% (from 1954 to 1957).  To be clear, while we might see a tiny tightening akin to what was experienced in 1936, we doubt that we will see anything much larger before we see a major easing via QE.  By the way, note that since 1980 every cyclical low in interest rates and every cyclical peak was lower than the one before it until interest rates hit 0%, when QE needed to be used instead. That is because lower interest rates were required to bring about each new re-leveraging and pick-up in growth and because secular disinflationary forces have been so strong (until printing money needed to be used instead). We believe those secular forces remain in place and that that pattern will persist.

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(Reuters) - Bridgewater Associates' Pure Alpha II Fund, the firm's flagship hedge fund, was down 6.9 percent in August but still up 4.1 percent year-to-date as of Aug. 31, two sources familiar with the fund said on Tuesday.

Pure Alpha is a traditional hedge fund strategy that actively bets on the direction of various types of securities, including stocks, bonds, commodities and currencies, by predicting macroeconomic trends.

Bridgewater, the world's largest hedge fund, manages $162 billion in assets and the firm's Pure Alpha strategies had approximately $70 billion in assets under management.

Last week, Reuters reported that Bridgewater's "All Weather Fund" fell 4.2 percent in August and is down 3.76 percent so far this year, according to three people familiar with the fund's performance.

Equity markets worldwide stumbled in recent weeks, driven lower by concerns about China's growth and worries the U.S. Federal Reserve will soon raise interest rates.

The moves, coupled with weakness in commodities and bonds, wreaked havoc on hedge funds that use risk-parity strategies such as the All Weather Fund, which are supposed to make money for investors if bonds or stocks sell off, though not if both markets fall at the same time.

(Reporting by Lawrence Delevingne and Jennifer Ablan; Editing by Jeffrey Benkoe and Chris Reese)

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