Interview with Bridgewater CEO David McCormick...
Why couldn't Bridgewater generate alpha? Is it cuz' the average employee no longer believes in Ray Dalio's Principles? David reflects on being fired from Co-CEO, Covid performance, founder transition.
It’s not often one gets to interview the person running the world’s largest hedge fund and successor to legendary investor Ray Dalio, but well we did it…
Our most recent episode features David McCormick – the CEO of Bridgewater Associates, the world’s largest hedge fund with over $140 billion in assets under management. David joined Bridgewater in 2009 and was President and Co-CEO before becoming CEO in 2020. Prior to Bridgewater, he was the US Treasury Under Secretary for International Affairs in the George W. Bush Administration during the 2008 global financial crisis, and he also had senior roles on the National Security Council and in the Department of Commerce.
In the interview, David talks about his personal journey from the Army to the Treasury and Bridgewater; the ten-year leadership transition that he and founder Ray Dalio had just completed; the challenges he experienced when managing Bridgewater over the years; macro-financial topics such as Bridgewater’s “Monetary Policy 3” framework; and his vision for a “national innovation policy” allowing for more frontier civilian technology to enter the military space.
There is too much to unpack. We’ll find another time to talk about the macro-finance and national security issues David has highlighted. In this email I’ll only write about Bridgewater’s transition process and recent performance challenges.
It’s always been extremely difficult for firms to transition from founders to sustainable institutions, and some have speculated Bridgwater is running into this problem, as many in the firm might no longer truly believe in Ray Dalio’s Principles like the first-generation Bridgewater employees or the current senior leadership do. This transition difficulty may be the reason preventing Bridgewater from generating alpha…
David was fired the first time he was Co-CEO
David gave us some fascinating details of Bridgewater’s leadership transition process that I had previously not read elsewhere. All quotes are lightly edited for clarity:
[14:06] It’s hard to transition from a founder – where you have this iconic founder and the organization really reflects that person – to an institution, which it doesn’t reflect any person, but rather lots of people in a common culture. The key is to really move from where it’s no longer about one person, but it’s about a team of people coming together for success.
So my role of has evolved over time, but the important part of the history – and it was unpleasant at times – is that I had been at Bridgewater for a couple years by 2012, and I got a phone call from Ray asking me to become the Co-CEO with Greg Jensen, one of my partners and Ray’s protege.
So Greg and I became Co-CEO in 2012. We were in that role for about 18 months, when Ray came back and said, in particular to me, that he didn’t think I was doing a good enough job. So he fired me from the Co-CEO job and asked me to take a lesser job of with the title of “President,” where I was responsible for a big part of our business, but I was done with the CEO.
That was an incredibly hard moment for me, and it was very indicative of Bridgewater’s culture. By the way, Ray and I didn't agree on what was going on at the time. I thought he wanted to come back for a variety of reasons; he thought I wasn't going doing well enough. In retrospect, probably true on both sides – I definitely wasn't doing well enough.
So I really considered leaving Bridgewater at that time. I had some personal things going on that made me want to stay the course – I had some young children that had just moved to Connecticut, so I said I’ll give it a couple years to try to sort through my personal situation.
In the course of those next couple years, things started to go really well, and the job that I was doing went really well, and Bridgewater was very successful during that period. So I was happy and decided to stay.
And in 2016, Ray came back to me and asked me to be the Co-CEO again. I thought about it and ultimately wasn’t convinced that role made sense because I really liked what I was doing and I had had that not-so-great experience the first time. And we agreed, with a certain set of conditions, that I would do it, so I took that job in 2017 and eventually just transition to CEO last year.
The thing that's important is not so much the me in the CEO role versus the Co-CEO role or whatever. It’s the evolution over time – the incremental transition from that one single person who’s responsible for so much to a team of people that hopefully can be successful; where we no longer depend on a single person, but become an institution where there are lots of succession and capability.
Bridgewater is having a tough time
I was telling some of my friends (outside of the financial world) that we were interviewing David for the podcast, and everyone’s reaction was: “oh aren’t they having a terrible year?” – which shows two things:
College kids who know nothing about finance can be quite judgemental despite their own complete lack of qualification…
It’s no secret that Bridgewater hasn’t been performing well, and for some reason the word spread so quickly and widely, as if people were actively hoping for Ray Dalio and Bridgewater’s downfall. Schadenfreude I suppose…
Institutional Investor wrote a very comprehensive profile last August with the title “Bridgewater Is Having a Bad Year. David McCormick Has a Plan”:
“The clients certainly would’ve hoped we’d had better performance,” [David] admits. Pure Alpha II, for example, which aims to return 18 percent regardless of broader markets, has delivered negative 2 percent over the last five years as of July, net of fees. Firmwide assets have fallen from a peak of more than $160 billion to $140 billion, which McCormick says is “primarily a consequence of our performance.”
(The article was a great read that can get you up to speed on Bridgewater’s challenges, upcoming plans to reboot the fund, and David’s management of the firm at the beginning of Covid.)
David reflects on Bridgewater’s pandemic performance
David spoke quite frankly about the fund’s recent drawdowns and underperformance compared to the broader market. He says that Bridgewater has always bounced back stronger after brief periods of drawdowns and that these difficult moments have only made the fund stronger:
[22:55] We had a certain set of positions on the market where, when Covid hit, we lost a lot of money in our portfolio. We were down significantly – double digits – by the end of March, and spent the rest of the year trying to do three or four things at the same time:
Make sense of the new environment. Because we’re fiduciary, we have to be thoughtful about how we handle those circumstances with our own portfolio to be responsible with our clients’ money. So it’s accelerating learning where our people are working around the clock to make sense of the new dynamics.
We’re trying to help our clients navigate through Covid. They’re worried about our portfolio, but they’re much more worried about their overall portfolio because we’re usually a tiny piece of their portfolio. So to make sense of this world for them was important.
(The Institutional Investor article above talked about how Bridgewater has its “risk budgeting tool,” known internally as the “RBT.” Intended as a “uniquely sophisticated way of helping clients do portfolio planning and understand risk,” according to McCormick, the technology platform basically lets clients analyze the entirety of their portfolios — not just the hundreds of millions, or billions, they have with Bridgewater. “In seconds, we can apply hundreds of thousands of slices of data, hundreds of unique stress-test scenarios, and dozens of specific reports on parts of our client’s portfolio,” according to an internal document, which also claims that 90 percent of the firm’s largest clients use the tool.)
We’re dealing with a new form of work, which is work from home. Fortunately we had had technology capabilities that we had just put in place that allowed us to make that transition seamlessly.
You’re caring for people at a time when being remote prevents you from giving them the normal sorts of care and support that you’re typically able to do in normal times. Meanwhile, people are dealing with their own fears and uncertainties – the lack of child care, a sick parent, sickness with Covid…
That was the world you were confronted with, so the question is how do you deal with that. We dealt with it through the few principles I just mentioned – calmness; taking decisive actions; being very transparent with our clients; making sure we gain the insights quickly enough to be able to help them; and taking care of our people, which includes making some tough choices on our cost to create the room for our stability of our business, but also investing in the things we needed to invest in to be able to navigate this storm.
So it was an incredibly challenging period, and I honestly think as an institution we're better at the end of this than we were at the beginning. Trials, pressures, and stresses –if they're not to the extreme where they kill you, if you can come through them, they ultimately make you stronger. So I think we’re stronger as leaders and as a business. The suffering of Covid was horrific and something we shouldn't skate past, but organizationally I think it forced us to confront some realities that was very helpful.
Everything seems great, but it’s just very hard to generate alpha
What David said about firm management and transition all sounds wonderful, and the content produced by Bridgewater’s research team also seems top-notch from an investment analysis perspective, so it begs the question – why couldn’t they make money?
I ask this question in the sincerest way possible. I’m not being facetious or rhetorical as I honestly don’t know anything about hedge fund management, or even what investment strategies and asset classes that Bridgewater pursues on a day-to-day basis. I look at the Bridgewater people from the outside with a deep sense of respect, and I’m just puzzled why this group of brilliant people couldn’t beat the market, at least not in 2020 when “STONKS only went up.”
One explanation, provided to me by someone in the financial world, was that people in Bridgewater simply don’t drink the Kool-Aid anymore – they don’t truly believe in Ray Dalio’s Principles like the first-generation Bridgewater employees or the current senior leadership do.
Surely, someone like David and Co-CIOs Greg Jensen and Bob Prince exemplify everything that’s successful with Bridgewater’s management and investment framework, but whether the fund can generate alpha heavily depends on the mid- and low-level employees. David cannot run the numbers himself or even directly oversee the analysts who run the numbers; it’s the 20- and 30-year-olds in the firm that produce and execute a company’s day-to-day decisions. And if they don’t believe in the company’s philosophy, it’s a huge problem.
But then, whether an average employee would do good work also heavily depends on the senior leadership. “Ray Dalio would ‘whip’ people into producing results,” joked one person to me. He just somehow forced the organization into generating alpha, and perhaps this is the unique power that a founder usually has and tries so hard to institutionalize and pass down.
Transitioning from founders is a huge challenge, but it can be overcome
Succession from founders has proven to be tremendously difficult – whether at hedge funds or beyond.
Microsoft didn’t do so well when Bill Gates first passed the control to Steve Ballmer, and it was only after Satya Nadella took over as CEO that the firm became successful again. Apple, on the other hand, did tremendously well with Tim Cook after the passing of Steve Jobs and departure of Jonathan Ive (the Chief Design Officer responsible for all the products we’ve become ingrained with). It’s just remarkable how Apple has maintained their distinct firm culture & design style and flourished to greater commercial success over the years.
Billionaires like Dan Och of Och-Ziff Capital Management, Seth Klarman of Baupost Group, Israel Englander of Millennium Management have all had trouble in recent years when trying to put a new generation to lead their firms.
Pete Muller, founder of PDT Partners and one of the most successful quant hedge fund managers of all time, came on our podcast more than a year ago. He said his firm was doing very well under his leadership, so he left to focus on music, and the firm didn’t do well anymore, so he had to take a break from touring the country as a musician and come back to managing the firm, and eventually the firm did well again after he put in a few years of hard work getting it back on track. (He had told the story so casually during the interview that my co-host Arjun and I couldn’t help but laugh…)
Tomorrow we’re releasing our interview with Tony Yoseloff, leader of Davidson Kempner, another one of the world’s largest hedge funds. He took over from the firm’s co-founder Thomas Kempner in January 2020 after years of transition in the making as well. We spent a lot of time discussing how exactly he navigated through that process, which warrants another email to highlight.
In general it just seems that transitioning from founders is a big issue. What David said resonated a lot for me, as Policy Punchline is currently going through our own transition process. I started Policy Punchline as a sophomore and did more than 150 interviews in the subsequent 2.5 years. At first it felt nice to be able to do tons of interviews and be at the driver seat when creating this organization, but as time went on, my involvement seemed to grow into a liability and obstacle to the podcast’s sustainability.
Not saying that our podcast in any way comparable to Bridgewater, but all this is honestly what has been keeping me up at night for a long time. Hopefully we’ve learned a lot from David and Tony to do well in our transition going forward, but let’s save that for another time.
I know Bridgewater has had a tough year, and it is very convenient to dismiss their success at the current moment when it had just completed its leadership transition. But I wouldn’t write off all the progress the firm has made over the years, and especially in the past year. In moments of leadership transition, there are structural headwinds at play that I think any organization – even the most successful ones – would naturally struggle a bit to cope with, but it doesn’t mean they cannot be overcome and used to make the organization stronger.
Unlike with most other issues, I am quite optimistic this time…
Disclaimer: Needless to say, my emails are just casual commentaries. I try my best to write them thoughtfully and with care to provide some alternative perspectives on various issues, but please do not treat them in any way as financial advice for your own investment.
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