Evolution of Bridgewater and its Investment Innovations

Key Insight

Bridgewater grew from 42 employees and $4.1 billion under management in 1995 through an iterative, evolutionary process that refined investment systems started in 1982. This involved continually wrestling with markets, making and diagnosing mistakes, and systematically implementing improvements. The firm, initially a group of bright individuals, became a well-equipped establishment, expanding its workforce with young programmers and new graduates, such as Greg Jensen who joined in 1996 and rose to co-CEO.

A significant innovation emerged when engineering a portfolio to produce a 5 percent return above the U.S. inflation rate. This led to the discovery and research of leveraged foreign inflation-indexed bonds, hedged to U.S. dollars, as U.S. inflation-indexed bonds did not exist. Analysis revealed this novel asset class could offer the same expected return as equities with less risk and a negative correlation to bonds and equities over long time frames, establishing the firm as the first global inflation-indexed bond manager. In 1996, U.S. Treasury deputy secretary Larry Summers consulted them, and the Treasury subsequently adopted their recommended bond structure.

Another industry-shaping concept, now known as 'risk parity' investing, originated from seeking the optimal asset allocation to preserve wealth across generations. Recognizing that all asset classes eventually lose value and anticipating market swings is difficult, a portfolio was designed to perform well in all economic environments by identifying four strategies, each thriving under different combinations of rising or falling growth and inflation. This 'All Weather Portfolio,' initially used for a family trust from 1996, eventually attracted institutional clients like Verizon's pension fund in 2003, leading to nearly $80 billion under management a dozen years later and inspiring other investment managers to create their own versions.