We recently learned a bit of history about hedge fund billionaire Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates.
It turns out he helped McDonald’s launch Chicken McNuggets.
In the early years of Bridgewater, which today manages $160 billion in assets, Dalio did some consulting work.
At that time, Dalio helped his client, McDonalds, come out with its low-priced Chicken McNuggets.
McDonalds was worried about the price of chicken rising, which would either squeeze margins or force the fast-food giant into raising prices.
Dalio then had the idea to create a special kind of derivative to hedge the fast-food giant’s chicken farmers’ exposure to price fluctuations.
Here’s how Bridgewater tells the story:
Ray founded Bridgewater in 1975 in his New York City brownstone apartment. At the time, he actively traded commodities, currencies and credit markets. His initial business was providing risk consulting to corporate clients as well as offering a daily written market commentary titled Bridgewater Daily Observations that is still produced. The competitive edge was creative, quality analysis.
Among his clients were McDonalds and one of the country’s largest chicken producers. McDonalds was about to come out with Chicken McNuggets and was concerned that chicken prices might rise, forcing them to choose between raising their menu prices or having their profit margins squeezed. They wanted to hedge but there was no viable chicken futures market. Chicken producers wouldn’t agree to sell at a fixed price because they were worried that their costs would go up and they would then take a loss on their supply contracts. After some thought, Ray went to the largest producer with an idea. A chicken is nothing more than the price of the chick (which is cheap), corn, and soymeal. The corn and soymeal prices were the volatile costs the chicken producer needed to worry about. Ray suggested combining the two into a synthetic future that would effectively hedge the producer’s exposure to price fluctuations, allowing them to quote a fixed price to McDonalds. The poultry producer closed the deal and McDonald’s introduced the McNugget in 1983.
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