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clients and the firm.
     
    At the same time Dalio was finding ways of being uncorrelated to the market, he was making the discovery that other firms were becoming increasingly correlated to the market. Bridgewater wrote to investors in 2003 that hedge funds in aggregate were over 90 percent correlated to the equity market and that, within substyles, the managers were all highly correlated to each other. “The basic point here is that many hedge funds have a lot of beta (systematic risk) embedded in their strategies and returns. Investors investing in hedge funds need to consider the implications of these systematic risks in the hedge funds they are invested in.”
     
    Sage advice from Dalio that would be realized in the 2008 financial crisis when 90 percent of hedge funds lost money and did not provide the downside protection or absolute returns.
     
    Calculating Crises
     
    “I think it would probably be a good idea to show you something called our crisis indicator,” says Dalio one bright spring afternoon at the firm’s retreat-like offices. Designed by noted architect Bruce Campbell Graham, the campus has three buildings constructed mostly of glass and midcentury fieldstone. The firm moved to Westport in 1990, and, like its corporate culture and hierarchy, the buildings are mostly flat and the spaces meticulously organized. Employees park their cars between the trees of the small forest across from the entrance, and lights hang from the branches. Once a natural reserve filled with large lakes, there is a serene ambience to Dalio’s inner sanctum. Somewhat contradictory to its placid work environment, however, the Bridgewater team is awfully focused on crisis.
     
    Dalio creates universal investment and management principles by learning from history. He analyzes how different countries, cultures, and people around the world react to different incidents like debt or oil shocks, for example, and figures out the variables that affected the different outcomes. Stripping away all the variables let Bridgewater arrive at universal laws for doing business. “If you’re limiting yourself to what you experienced, you are going to be in trouble. . . . I studied the Great Depression. I studied the Weimar Republic. I studied important events that didn’t happen to me.”
     
    Doing this over time led Bridgewater to develop ideas such as its crisis indicator. The crisis indicator looks at each of the major markets to show their correlation to overall market risk, which is part of the reason Bridgewater has always historically kept its leverage low by industry standards, about three to four times assets over equity over the life of the firm. By comparison, Lehman Brothers was more than 40 times leveraged before its collapse in 2008. In fact, Dalio believes that its limited use of leverage is one of the main reasons the firm has survived for more than 30 years. “Using leverage is like playing Russian roulette. It means that you are inevitably going to get a bullet in the head.”
     
    Dalio explains, “As risk at a particular period of time increases or decreases, it is either going to have a positive or a negative effect on certain markets and in various magnitudes.” For example, when dealing with bad economic conditions and higher default risks, Treasury bonds would have a positive beta, and equities would have a negative beta. And each instrument has various betas to it. “You can go back to Argentine stocks and certain emerging currencies,” Dalio says. “They all have various betas that we can see and adjust according to changes in the global risk environment. As a result, we pay attention to those things in structuring the portfolio. It’s a computer system that’s constantly updated.”
     
    Foreseeing the Financial Crisis
     
    It was the constant economic monitoring and fund evolution that led Dalio to the conclusion in 2006 that the American economy would be heading toward a bankruptcy-like situation, one where