Andrew Hallam

The Surprising Eleven-Year Gains For The World’s Most Famous Hedge Fund

I first heard about Ray Dalio in 2011. The New Yorker published a fascinating article, Master the Machine, explaining Dalio’s management principles and his hedge fund’s spectacular returns. In fact, it was the largest and most famous hedge fund in the world.

Dalio is brilliant. The New Yorker’s journalist, John Cassidy, said:

“Other hedge funds have tried to mimic Dalio’s approach, which is sometimes referred to as “portable alpha,” but none have proved as successful. The strategy depends on an ability to outperform the market consistently, which many economists regard as virtually impossible. Dalio somehow seems to manage it.”

Consistently beating the stock market is often deemed, “impossible” because it requires two layers of fortune telling. The first layer requires the use of a crystal ball (or magical catcher’s mitt) to predict future corporate business earnings, future interest rates, geographic political environments, wars and, dare we say, pandemics. The second layer requires us to forecast how people will respond to such news.

Sorry economists. You have no idea how people think. In fact, economists might be among the world’s worst professionals at predicting human emotions. Financial algorithms likely run a smidge behind.

For example, when one currency rises and another falls, this isn’t a result of some mystical scepter. Instead, it’s a result of more people buying one currency and selling another. It’s simply supply and demand. If more money were spent buying euros than selling euros, the euro would rise against the dollar, assuming more people were selling dollars than buying them. Short term, human emotions move asset prices…not economics.

The same goes for individual stocks. Tesla, for example, is building and selling far more cars today than it did in 2020. But in 2020, the stock market rewarded Telsa with massive stock price surge. Was that predictable? If you believe it was, I have a broken toaster to sell.

In contrast, in 2022, Tesla’s net income was 1,494 percent higher than it was in 2020. But in 2022, Telsa’s stock price fell off a cliff. More people sold Telsa’s shares than bought Telsa’s shares.

Economics aren’t in the driving seats when investment prices change. That’s why the world’s smartest investors (guys like Ray Dalio) might get lucky for a while. But they can’t predict the market.

This brings us back to 2011. Some people believe the New Yorker article proved that an elite, special person could forecast economics, business earnings, and people’s reactions to those economics and earnings. I followed Ray Dalio’s Bridgewater Pure Alpha Hedge fund every year after reading that article in 2011. After Dalio’s hedge fund had a good year, the media trumpeted the fund’s return, further cemementing Dalio’s legendary status. When it had a horrible year, it seemed the media was mostly quiet.

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Individual hedge fund performances are shrouded in mystery. For example, most hedge fund managers fail to post their year-by-year or long-term returns on company websites. The Bridgewater Pure Alpha Fund is no exeption. But at the end of every year, investors in the famous fund leaked that year’s performance to major publiciations like The New York Times, Forbes, Fortune or Businessweek. These investors were part of an exclusive club…and obviously proud.

But if you’ve been investing in a diversified portfolio of index funds or ETFs since 2012, you have destroyed the 11 year performance of Ray Dalio and his team. Say again???? Yes, I’ll say that again. You have whipped Ray Dalio’s brilliant team.

You say your portfolio is uber conservative, with just 40 percent global stocks and 60 percent global bonds? No problem. You beat the world’s most famous hedge fund over the eleven years ending December 31, 2022. Name a diversified allocation. Any diversified allocation. Over the past eleven years, I’ll bet you a burger you crushed the world’s most famous hedge fund.

Bridgewater’s Pure Alpha fund averaged a compound annual return of 1.5 percent per year from January 2012 to December 31, 2022. That’s a total 11-year return of 17.8 percent. That barely beat inflation.

Meanwhile, the global stock market index averaged 8.93 percent over the same time period. That was a total 11-year return of 155.6 percent, compared to 17.8 percent for the world’s most famous hedge fund.

The S&P 500 Index of US stocks averaged 12.71 percent over the same 11 years. That was a total 11-year gain of 273 percent. Once again, that made the hedge fund look silly.

Even US bonds, despite their recent, massive drop, gave the world’s most famous hedge a toe-to-toe race. Vanguard’s Total Bond Market Index averaged 1.29 percent over the 11 years from January 2012 to December 31, 2022. From January 2012 to December 31, 2021, US bonds actually beat Ray Dalio’s special fund.

I’m not saying Ray Dalio and his team are not brilliant people. But nobody can see the future.

As investors, however, you will be tested. You’ll read about a fund manager who possesses magic fairy dust. They might have a great, long term return. But reversion to the mean is real. Actively managed funds that perform well during one time period usually lose their winning way.

That’s why we should build and maintain a diversified portfolio of index funds or ETFs. We’ll never grace the cover of a magazine, like Ray Dalio or Cathie Wood might. But by playing the long game, we should give most (if not all) famous fund managers a really solid beating.




Andrew Hallam is a Digital Nomad. He’s the bestselling author Balance: How to Invest and Spend for Happiness, Health and Wealth. He also wrote Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

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