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column A and your alpha from column B. “We probably have 40 different benchmarks that the client can choose from,” he says. “How spicy do you like the alpha? If you want 6 percent volatility, you just put half the money in the 12 percent fund. If you want 18 percent volatility, you put 100 percent of your money in the 18 percent fund. If you want 1.8 percent volatility, you just take 10 percent of your money and put it into the 18 percent fund. It’s our best mix of alphas applied to every account we manage,” says Dalio.
     
    After a year or two of tracking performance and seeing that they had all performed as predicted, investors became more accepting of the notion of separating alpha and beta and of putting that together in the fund. “We did it simply for functional reasons,” says Dalio, “and lo and behold the world calls it a hedge fund.”
     
    Belly Up: Learning from the Bad
     
    There were also rough times at Bridgewater, but all proved great learning experiences for Dalio and his team. His most painful experience was trading pork bellies in his personal account in the early 1970s. Because hard commodities had stop limits, if the commodity hit a certain price of “limit,” it would stop trading for the day. During one dark week, pork bellies traded down further and further, causing them to hit their daily limit price day after day and forcing Dalio to stay in the position. He ended up losing “damn near everything.”
     
    “It was great in that it was terrible,” says Dalio, reiterating that you always learn more from the bad experiences in your life than the good. “It was a fantastic learning experience.”
     
    Bridgewater also took a hit on missteps investing in sovereign bond markets, a position it sold off after the surprise Fed tightening in 1994. The firm was long various global bond markets, and, when the Fed tightened, they all became correlated to each other and lost money. Ultimately, the fund returned 2 percent that year but acquired something of far greater value: a better procedure and strategy going forward.
     
    “We learned that if you had the same positions in a variety of countries, that you could take our relative views in each country and trade those on a duration-neutral spread basis,” says Dalio. “By doing so they would systematically guarantee the fact that we wouldn’t have correlations to the broader market. So what we did was we discovered essentially how to restructure the balancing of our positions to produce greater diversification. That carried forward into all the markets we traded.”
     
    Bridgewater made a further step toward the separation of alpha and beta when, in 2006, it stopped managing traditionally constructed global bond and currency accounts. From its first experiment separating alpha and beta for its clients in 1990, Bridgewater had found it was the best way to manage money. Its method is to take a value-added return from active management (alpha) minus the return from passively holding a portfolio (beta) and create optimal portfolios for each where clients specify their desired targeted level of risk. Bridgewater called its first optimal alpha strategy Pure Alpha, and it would be an integral step in the process for every investment made across the fund.
     
    So, toward the end of the 2006 Bridgewater sent letters to clients about the “constrained” nature of those alpha-generating strategies, which didn’t permit the firm to move freely among asset classes. Bridgewater announced that henceforth clients would use Pure Alpha in conjunction with its bond or currency accounts; those unwilling to make the transfer would be resigned within 12 months. Once among the largest traditional global bond and currency managers in the world, Bridgewater today uses Pure Alpha only in conjunction with its actively managed accounts. While some would find this risky, Dalio maintains it is a better way to manage money and reduce the risk of underperformance for