The World’s Largest Hedge Fund Is Building an Algorithmic Model From its Employees’ Brains

By Rob Copeland and Bradley Hope

Deep inside Bridgewater Associates LP, the world’s largest hedge-fund firm, software engineers are at work on a secret project that founder Ray Dalio has sometimes called “The Book of the Future.”

The goal is technology that would automate most of the firm’s management. It would represent a culmination of Mr. Dalio’s life work to build Bridgewater into an altar to radical openness—and a place that can endure without him.

At Bridgewater, most meetings are recorded, employees are expected to criticize one another continually, people are subject to frequent probes of their weaknesses, and personal performance is assessed on a host of data points, all under Mr. Dalio’s gaze.

Bridgewater’s new technology would enshrine his unorthodox management approach in a software system. It could dole out GPS-style directions for how staff members should spend every aspect of their days, down to whether an employee should make a particular phone call.

The system remains under development, and the exact details of its operations are still being debated inside the firm. One employee familiar with the project described it as “like trying to make Ray’s brain into a computer.”

Bridgewater manages $160 billion, the most of any hedge-fund firm. It has earned clients twice as much total profit as any rival, says LCH Investments NV, a firm that puts client money into hedge funds. Mr. Dalio personally earned $1.4 billion last year, according to research firm Institutional Investor’s Alpha.

Bridgewater’s flagship fund, however, was down about 12% on the year at one point in 2016, causing alarm inside the firm. The fund has since recovered to being up 3.9% in mid-December. A lower-fee fund was up 8.1%.

Rules for Bridgewater’s staff are laid out in a 123-page public manifesto known as the “Principles,” which every employee is expected to know and diligently apply. Along with maxims such as “By and large, you will get what you deserve over time,” the Principles are filled with advice from Mr. Dalio such as “Don’t ‘pick your battles.’ Fight them all.”

Bridgewater says about one-fifth of new hires leave within the first year. The pressure is such that those who stay sometimes are seen crying in the bathrooms, said five current and former staff members. This article is based on interviews with them and more than a dozen other past and present Bridgewater employees and others close to the firm.

Mr. Dalio returned to run Bridgewater earlier this year after stepping back to a mentor role six years ago. Within a few weeks, he gathered managers under a tent and said the firm had grown bloated and inefficient. The fix, he said, would be a “renovation,” in which weak employees were let go.

Staff cuts began almost immediately. Since his return, head count is down by about 150, or 10%. Hundreds more may be cut in coming months, though some are expected to be replaced eventually. The budget for the holiday party, which in the past has had elaborate decorations, such as Christmas trees hanging inverted from the ceiling, has been trimmed by 20% this year.

Stung by public disclosures early this year of internal tumult, Mr. Dalio changed a decades-old system of making all high-level deliberations and decisions known to every member of staff. Instead, he decided to let only around 10% have the full measure of what he calls “radical transparency.”

He wrote a new principle, not yet public, that says, “Expect those who receive the radical transparency to handle it responsibly and don’t give it to them if they can’t.”

When an employee challenged Mr. Dalio in an open meeting on whether the response was proportionate to the leaks, he replied that as the inventor of the firm’s management system, he determined it was.

Mr. Dalio founded Bridgewater in 1975 as a research shop based in his two-bedroom Manhattan apartment. He earned attention for his ability to predict macroeconomic trends.

The underpinning to his success, Mr. Dalio often says, is his belief that markets reflect the workings of a misunderstood economic machine, and interpreting its mechanics requires a relentless and often painful dedication to getting to the truth through “thoughtful disagreement.” That’s why employees are encouraged to challenge each other repeatedly and without reservation.

The economy, Mr. Dalio has written, is “really just a zillion simple things working together.” Decades before computer-driven trading came into vogue, Bridgewater began tracking relations among what are now 100 million separate data points, such as international interest rates and retail sales, and creating investment algorithms.

The main hedge fund embodying these algorithms, Pure Alpha, uses the data to buy and sell stocks, bonds, currencies and other assets. The fund has long anticipated booms and busts around the world, including the looming financial crisis as early as 2006, the firm has told investors.

Mr. Dalio also believes humans work like machines, a word that appears 84 times in the Principles. The problem, he has often said, is that people are prevented from achieving their best performance by emotional interference. It is something he thinks can be overcome through systematic practice.

That applies to managing, too. Successful managers “design a ‘machine’ consisting of the right people doing the right things to get what they want,” he wrote in the Principles.

The “Book of the Future” software to automate management, a project Mr. Dalio has also sometimes referred to as “The One Thing,” later gained the more formal name of Principles Operating System. Abbreviated PriOS, it is an attempt to make management nearly as systematic as the firm’s investing process.

Data are incorporated from a phalanx of personality tests that Mr. Dalio requires of his employees. In one, managers undergo written exams to determine their “stratum,” an unconventional score for conceptual skills developed by the late Canadian-born psychoanalyst Elliott Jaques.