In 1975, this Harvard Business School graduate ended his career at Shearson Hayden Stone and founded Bridgewater Associates in his apartment. This was a macro hedge fund, and Ray Dalio convinced some old clients to hire him as a consultant, starting his new career.
A hedge fund, also known as a hedge fund or arbitrage fund, refers to a fund that uses hedging trading techniques to profit. They use hedging to avoid or reduce risk, but in fact, in the developed capital markets of the West, such funds often use high leverage and increasingly complex derivatives for investment, with risks far exceeding those of funds using traditional trading methods.
As a branch of macro hedge funds, these funds make leveraged bets on price fluctuations in global stock, currency, interest rate, and commodity markets to generate returns.
Although Bridgewater Associates has been established for less than ten years, it has already gained a reputation in the international financial market. Its precise analysis of market and economic conditions and the creation of numerous investment strategies have made it stand out among peers.
The 1980s were not yet the golden age of hedge funds, but a group of hedge funds, led by Quantum Fund, achieved impressive performance, attracting investors to hedge funds.
During this period, the famous figures of the future were still struggling. James Simons, the founder of Renaissance Technologies, had only been in business for two years, leading his team of geniuses to create models. The Medallion Fund had not yet been established, and Jeff Bezos was still studying hard at Princeton University.
In the 1970s, the Bretton Woods system, established after World War II, collapsed, and the world entered the Jamaican system. The foreign exchange market began to implement a floating exchange rate system. With the fluctuation of currency exchange rates and gold prices, international financial crises frequently occurred.
The Bretton Woods system was an international monetary system established after World War II, with the US dollar as the international trade settlement unit. Its core content was that the US dollar was pegged to gold, and other countries' currencies were pegged to the US dollar, with fixed exchange rates. At that time, the United States was the only major country that did not experience war on its own soil during World War II, and its gold reserves accounted for 70% of the Western world, making the US dollar the only currency that could be pegged to gold, hence it was also called "American gold."
In the 1960s and 1970s, the United States became involved in the Vietnam War, leading to increasing fiscal deficits and persistent current account deficits. A large amount of capital fled, converting dollars into gold. After consultations with the Allies, the United States announced that the US dollar would no longer be pegged to gold and could no longer be exchanged for gold.
Later, under the leadership of the IMF, the member countries held a meeting in Kingston, Jamaica, and established a new international monetary system, the "Jamaican System."
The main content of the "Jamaican System" was to recognize the floating exchange rate system, allowing fixed and floating exchange rates to coexist. Member countries could choose their own exchange rate systems, and the IMF would supervise the exchange rate policies of various countries. The agreement also stipulated that gold would be removed from the international monetary system.
As a result, the US dollar was no longer the only reserve currency. With the recovery and rise of the economies of West Germany and Japan, the mark and the yen became increasingly strong, becoming important international reserve currencies.
In the 1970s, China and Japan established diplomatic relations, and their relationship normalized. By the 1980s, the relationship reached a peak, with frequent exchanges in politics, economics, and culture. In 1979, Japanese Prime Minister Masayoshi Ohira visited China and promised to provide the first batch of government loans. Another batch of government loans was provided in 1983, making a significant contribution to China's economy, which was in dire need of funds after the reform and opening up.
In this context, Chinese enterprises naturally turned to Japanese financial groups for funding. China Trust issued a large amount of bonds in the Japanese financial market two years ago to raise funds for the construction of large chemical enterprises.
Unlike interest-free loans and repayment agreements between governments, China Trust, as a company, had to pay interest and bear the risk of exchange rate fluctuations.
By the late 1960s, the Japanese economy had become the second-largest in the world, and by the 1980s, it had reached its peak. As the Japanese economy shifted from "investment-led" to "export-led," even after the oil crisis, when the entire Western world was in turmoil, the Japanese economy grew at an average rate of over 10% in the latter part of the 1970s. Japanese products, from pocket-sized Walkmans to luxury cars, dominated the global market.
In this situation, the value of the yen became particularly noteworthy. It is well known that the lower a country's currency exchange rate, the more favorable it is for exports. As an "export-oriented" economy, the low yen exchange rate greatly boosted Japan's economic development. However, with the rapid development of the Japanese economy, the pressure for the yen to appreciate also increased.
China Trust raised funds in yen, with a term of 12 years. If the yen appreciated during this period, it would be a disaster for China Trust. The repayment currency would be the renminbi, which could amount to an astronomical figure.
Therefore, the senior management of China Trust specially invited Ray Dalio, the founder of Bridgewater Associates, a leading expert in currency risk management in the international financial market.
Currency management outsourcing involves outsourcing currency risk management to professional institutions, divided into passive and active types. Passive management can compensate for exchange rate losses, while active management aims to generate returns for clients. The senior management of China Trust hoped that Ray Dalio could manage the risk of the yen they were about to raise in the Japanese market.
Ray Dalio was also surprised by this invitation. At that time, diplomatic relations between China and the United States had only been established for five years, and the actual leader of China had visited the United States shortly after the establishment of diplomatic relations, opening a new chapter in bilateral relations. American companies and capital were looking at the vast Chinese market for the first time.
Ray Dalio got off the plane, looked around at the scenery, and sighed slightly before following the crowd out.
This red country was still mysterious to most Americans. Although he had already gained some fame in the capital markets, he still felt a bit uneasy. He only truly relaxed when he saw several middle-aged men holding up signs to greet him.
To his surprise, the other party was even more nervous. The plump middle-aged man at the front hastily wiped his hands on his suit before extending them, stammering:
"Nice... nice to... meet... you..."
Although he stammered, Dalio understood. He smiled understandingly, shook the man's hand, and gently reassured him:
"Nice to meet you too, take it easy."
However, when Dalio said "take it easy," the man became even more nervous, and his already damp palms became even sweatier.
"Mr. Dalio, I am your translator. My name is Zhongyi, you can call me Kenneth!" At this moment, the young man holding the sign spoke up.
"Oh, your English is very fluent, where did you learn it?" Dalio's face showed surprise as he asked.
"Yanjing." Zhongyi smiled shyly in response.
"Oh, really? I thought I was in Manhattan!" Dalio said dramatically, his face showing surprise.
"Mr. Dalio, you are very humorous. Thank you for coming, this way please." Zhongyi took Dalio's luggage and gestured welcomingly with his other arm.
"Are you not going to introduce these gentlemen, Mr. Zhong?" Dalio did not move, instead shrugging and smiling at the other men, who were standing there like statues.
Business etiquette was second nature to this seasoned capital market expert. Although it was his first time meeting these men, he would not be rude.
Zhongyi's face turned red, and he quickly introduced the China Trust officials in English. Dalio smiled and shook hands with each of them.
"Indeed, a foreign financial tycoon, even these small details are noticed!" the men thought in unison.
Although they did not understand the conversation, they could infer from the body language.
After the formalities were completed, Dalio followed Zhongyi, joking as they walked:
"Being chosen by a state-owned company in China is significant for both me and Bridgewater Associates!"
"Bridgewater?" Zhongyi, who had been leading the way, suddenly exclaimed.
Apart from forgetting to introduce his companions, he had been quite composed, and even the plump Mr. Lu, the section chief, praised Zhongyi's behavior, not minding his conversation with Dalio.
Of course, this was also because he did not speak English and could not engage in more conversation.
Before they could react, Zhongyi loudly asked:
"Bridgewater Associates? A hedge fund?"
"Wow, you know about hedge funds? That's great, it seems we have a common language!" Dalio's face showed genuine surprise and joy.
Before coming to the mainland, he had done his homework, knowing that the country had experienced decades of turmoil, and the entire society was in a state of stagnation, severely disconnected from the Western world. It was only a few years ago that the country's leadership decided to open its doors and reconnect with the world.
In such a country, someone knowing about hedge funds was indeed surprising. In Wall Street, even investors in hedge funds knew little about them. In fact, it was not until the late 1980s that hedge funds gained attention due to their outstanding performance.
Hedge funds are generally private, not open to the public, and to avoid regulation by securities commissions in various countries, they are usually registered as offshore companies in tax havens like the Virgin Islands and the Cayman Islands.
Now, this young man not only mentioned "hedge fund" but also seemed to have heard of his "Bridgewater Associates," which both surprised and delighted him.