Billionaire Ray Dalio, the founder of hedge fund behemoth Bridgewater Associates, did a Q&A with Bill Ackman of Pershing Square.
Dalio manages $US160 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.
Dalio asked him about price.
“I thought I was interviewing him?” Ackman said.
“When we think about a 2008, a 2008 could happen again…When I think about my job, you’re finding good value…I try to find value. When I’m thinking about those macro influences, they can change. I just was curious when we exchanged thoughts. I’m not trying to say one approach is better. As we wrestle with the question, I would be worried over the next three years…How does it feel to be long only?”
“We’re not long only,” Ackman said.
The conversation shifted to how Dalio invests and makes money. 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…. Correlation is an outcome, not a thing in and of itself.”
Ackman then asked Dalio about how he looks at risk.
Dalio said they look at “risk of ruin,” which is the most important thing. “I’m a very risk averse investor.”
Dalio employees 1500 people. Of that number, 300 are involved in the investment process in some way, Dalio said. He said they have teams that look at history and put together criteria (decision rules).
“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. “I learned over the years was that everything that surprised me and lost me money hadn’t happened in my lifetime, but happened in others’ 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.
“Did you quantify it?” Ackman asked.
“Thought about it,” Dalio said.
Dalio said you can quantify people. He said he’s given personality tests to the greatest shapers in our time. 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 if he could buy one stock, one currency, one asset, then where would he put his money.
“I don’t do that,” Dalio said.
The Harbour Investment Conference is an annual event brings together investors to share trade ideas, while raising money for the Boys & Girls’ Harbour.
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