Lessons from the World's Largest Hedge Fund

Apurva Sheth
With US$157 billion in assets under management, Bridgewater Associates, founded by Ray Dalio, is the world's largest hedge fund.

Ray Dalio began investing at the age of 12. He invested in an airline stock, the only stock he knew of trading below $5. He got lucky and tripled his money. But he only bought because it was 'available cheap'.

At 18, he had his first bear market experience and learned to go short. By the time he graduated from college, he'd started trading commodities. At 26, he founded an investment management firm, Bridgewater Associates, in Connecticut.

Bridgewater is one of the world's most successful hedge funds. The firm has made an estimated US$50 billion in profits for its clients over 20 years. Its flagship fund, Pure Alpha, has an envious track record - a 14.8% average annual compounded net return over a 20-year period.

As one of the largest investors in his own funds, Ray Dalio has amassed a huge fortune worth US$15.6 billion. As of March 2016, he was 48 on the Forbes billionaire list.

Mr Dalio shared some of his insights in Jack Schwager's book, Hedge Fund Market Wizards, in which he covered topics including his life philosophy, management, and trading strategies.

One aspect of Ray Dalio's trading strategy that stands apart is that he strongly believes in improvement through mistakes. That mistakes are a pathway to progress is the core of Mr Dalio's life philosophy, and it is reflected in Bridgewater's trading systems and corporate culture.

Dalio believes there is incredible beauty in every mistake. Each mistake is a puzzle...and a gem if solved. Each mistake is a reflection of incorrect procedure, but if that mistake can be figured out, it is easy to learn how to be more effective.

How has Ray Dalio learned from his trading mistakes?

Dalio's funds use a systemic approach to trade markets. He traces the origin of Bridgewater's system to 1980 when he developed the discipline of writing down the reasons when he entered a trade. When he liquidated the trade, he would compare what actually happened to his reasoning and the expectations he had when he entered the trade. This helped him learn from experience and improve his system. Obviously, the development of his system encompassed more than just this, but this simple discipline remains one of the keys to Dalio's success.

Many successful traders have developed a habit of recording their trades and their rationale for entering and exiting them in a trading journal. Maintaining a trading journal helps traders in many ways, including...

  1. It gives a complete picture
    A journal gives you a complete picture of your trading account. It is a complete historical record of all your trades with dates and prices. It will give you complete details of the profits and losses accrued from each of your trades.

  2. It helps plan and execute your trades easily
    When you enter a trade, you fill the details such as entry price, stoploss, target, and the rational for entering. By putting this information in black and white, you have a plan in place right from the start. When you have a plan, executing a trade becomes easy.

  3. It helps identify what works and what doesn't
    Successful trading is about doing more of what works and less of what doesn't. A trading journal helps you identify what works and what doesn't. For example, traders often complain about failed breakouts (that is, stocks that break from resistances and quickly turn back). Despite seeing this repeatedly, traders continue to look for and trade similar breakouts. Maybe they are not conscious of what's working and what's not. Or maybe they are trading out of impulse. In either case, a journal would help identify the problem.

  4. It helps keep your emotions in check
    A journal can give you a behavioural edge, which is more important than an informational or analytical edge. When you have your plan for your trade with you, there's no guessing. Trading becomes mechanical. For example, traders opt for an early exit at times out of fear of losing out on profits despite having a bigger target in mind. Planning your trades allows limited scope for fear or greed to impact your trading.

  5. It helps you develop a system Once you have a reasonable sample size of trades, you can analyse them and identify what works for you and what doesn't. This will help you build confidence and enable you to develop a system of your own that can rely upon without hesitation.

If maintaining a trading journal helped Ray Dalio build the world's largest hedge fund, then it can definitely help retail traders as well. We realised this early on and designed a special portfolio tracker exclusively for our Swing Trader subscribers.

This portfolio tracker incorporates not only a trading journal but a risk management system (which, as I've written before, is the backbone of my trading system). You can check out this video newsletter where I cover our portfolio tracker in detail.

Do you maintain a trading journal? Share your views in the Club or share your comments here.

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1 Responses to "Lessons from the World's Largest Hedge Fund"
seetharam sudhir
04 Apr, 2016
Apurva Sheth, very nice presentation, Maintaining the trading journal is necessary for a investor, its will be a reflection of the investments and the two face of coin in the financial market ups and down, mistakes and chances, achievement and failure, and many more. a good advice. Like 
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