Skip to main content

Bridgewater’s “Book of the Future”

Mike McDonald likes the cut of Virtual Ray Dalio's jib.
Getty Images

Getty Images

Bridgewater is betting big on data and an unorthodox form or algorithmic trading and you don’t get more successful in the hedge fund business than Bridgewater.

Ray Dalio was one of the earliest pioneers in the hedge fund space, and despite the secretive and unusual nature of his firm, Bridgewater has been a clear long-term winner. Thus when Bridgewater adopts a new strategy or tactic, the finance world should pay attention.

Recently Bridgewater reports have been coming out about a new program Birdgewater is investing heavily in around data analytics. The program is new for Bridgewater which is not a traditional algo shop the way Renaissance is.

Bridgewater does have a long history with data though – its macroeconomic prediction models were using reams of data long before analytics came into vogue - and Paul Volcker himself once reportedly said that Bridgewater produced more relevant analysis and statistics than the Federal Reserve.

It is little wonder then that Bridewater at heart is a closet factor investment firm. The firm is built around the view that using quantitative data to buy and sell assets is more effective than using humans since personal investment decisions are impacted by emotions. If all of this sounds familiar, it’s because it is very similar to one of the most common explanations researchers have found for the effectiveness of the momentum factor in investing. And momentum of course is the baseline strategy that underlies factor powerhouse AQR’s investing.

To address the problem of inefficient and emotional humans getting in the way of investing, Ray Dalio has a plan; Bridgewater’s new system which Dalio has referred to as the "Book of the Future" according to some sources.

The Book of the Future, or Principles Operating System (PriOS) is a technological platform driven by data which is designed to make investment decisions more effectively. In other words, it is a giant algorithm. But what’s interesting here is that the algorithm is designed to go beyond what traditional algo traders do.

As the Wall Street Journal recently reported, “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 PriOS system differs from traditional algorithms in the investing world in that most algo traders are using the a systematic approach to make investment choices like Buy or Sell faster than any human ever could. Now Bridgewater is aiming to take that same concept and use it to tell employees what they should be doing. For instance, PriOS could be used for obvious applications in business development or product pricing.

The idea may sound crazy, but it has real merit based on existing research in finance, economics and marketing. Let’s face it in some ways Bridgewater has always been unorthodox even in finance – but in this case, the idea of using data to help optimize decision making is not crazy at all. It does raise the potential issue of changing what it means to work in finance dramatically… at least at Bridgewater.

The goal of PriOS is that within five years, the system will be making roughly three-quarters of all management decisions including dealing with HR issues, sales issues, and many others. In theory, this could let Bridgewater reduce its staff, but it is just as likely that it would instead free up the staff to do other things. In this case, the remaining humans at the Bridgewater wouldn’t be there to make individual choices but to instead to help maintain and improve the system by designing the criteria PriOS uses to makes decisions.

Only time will tell if the PriOS system will live up to its potential. It is certainly radical and new as far as systems for using data go. Yet even if PriOS does not end up being imitated completely elsewhere, parts of it might be. The road ahead in finance is going to be driven by even more use of data it seems.



Ray Dalio To Start Pretending Like He's Not Running Bridgewater In Mid-April

Virtual Ray Dalio apparently ready to achieve The Singularity on April 16th.


Be Classy, Stop Using Monte Carlo Situations Incorrectly

Why not predict pricing correctly, like a true Monegasque?


Passivity Is The New Activity

Does active management ever have a role to play?