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Bridgewater to Launch Big Investment Fund in China, Three Decades in the Making

With government approval, Bridgewater Associates plans to use a new unit based in China to raise billions of dollars to buy and sell assets in the country. It could give founder Ray Dalio the kind of clout that has largely eluded Western financial firms in the world’s second-largest economy.

By

Rob Copeland ,

Bradley Hope and

James T. Areddy

SHANGHAI—Bridgewater Associates LP is poised to amass a huge investment fund in China, giving its founder, Ray Dalio, the kind of clout that has largely eluded Western financial firms in the world’s second-largest economy.

Bridgewater already manages billions of dollars invested outside China by Chinese institutions and the government itself. It also won rarely granted access to trade directly in local Chinese financial markets.

The next move by the world’s biggest hedge-fund firm would be even grander. With Chinese government approval, Bridgewater plans to use a new unit based in China to raise billions of dollars domestically to buy and sell assets in the country. The size and ambition of the new unit haven’t been reported previously.

Mr. Dalio, 68 years old, has been fascinated by China since his first trip there in 1984. He has been back several dozen times and has studied Chinese culture so closely that Bridgewater reflects aspects of Chinese political ideology, according to current and former employees. China could be crucial to Bridgewater’s future as Western investors withdraw money from hedge funds, citing high fees and lackluster returns.

This article is based on interviews with current and former Bridgewater employees who are familiar with its efforts in China, as well as other people close to Bridgewater.

Mr. Dalio turned Bridgewater into one of the most successful investment firms ever, making investors $49 billion since its launch in 1975, according to LCH Investments NV. Based in Westport, Conn., Bridgewater handles $160 billion and has about 1,500 employees.

Bridgewater’s lone office beyond its headquarters in Connecticut is in the Shanghai World Financial Center, part of the city’s Lujiazui financial hub.Photo: Qilai Shen/Bloomberg News

He has told associates at Bridgewater that he considers himself an “economic doctor” who has a unique ability to diagnose countries’ financial ailments, adding that China is his longest-term project. Mr. Dalio has made charitable donations totaling tens of millions of dollars in the country.

He has instructed the research team at Bridgewater to send notes about China directly to him for review before they are published.

“They aren’t there to curry PR in China,” says Peter Alexander, founder of Z-Ben Advisors, an asset-management consulting firm in Shanghai. “They are there to do business.”

Bai Weiqun, chief supervisor of market regulator China Central Depository & Clearing Co., says Bridgewater’s expansion in China is a result of its “financial market becoming more open and transparency improving.”

Non-Chinese banks, brokerage firms and mutual funds that have set up operations in the world’s second largest-economy have largely struggled to gain market share from domestic rivals.

Mr. Dalio’s history in China might help Bridgewater find a way around those challenges. His 1984 trip sparked “an incredibly rewarding thirty-plus year journey that has had a profound impact on my family and me,” he wrote in an autobiography set to be released later this month.

Regulatory rules are complicated and restrictive, and some companies have botched the cultural practice of deference.

In 1995, he told China’s official Xinhua news agency: “China is too big and exciting to ignore.” He assembled a $100 million fund to buy stakes in Chinese companies. The fund was disbanded without making any investments, and Mr. Dalio blamed the difficulty in doing business across time zones.

Around the same time, Mr. Dalio also sent his 11-year old son to live in Beijing with a local family for a year. In his autobiography, Mr. Dalio writes that the move “required special permission from the Chinese government.”

Since then, Mr. Dalio has ramped up his charitable giving in China and often traveled to the country for meetings with local executives and powerful officials in China’s state-run bureaucracy, including founders of the Shenzhen Stock Exchange.

Bridgewater Associates founder Ray Dalio at the World Economic Forum in Davos, Switzerland, in January.Photo: Simon Dawson/Bloomberg News

He spoke at the China Development Forum, an annual gathering that includes top government officials and requires a six-figure donation to a government agency to attend. Mr. Dalio started the Beijing Dalio Public Welfare Foundation, which has a mission “to contribute to a harmonious society.” He also has spoken to scholarship students at prestigious Tsinghua University, home to the Dalio Auditorium.

Over time, Bridgewater has raised billions of dollars for its existing hedge funds from Chinese clients such as the China Investment Corp. sovereign-wealth fund and State Administration of Foreign Exchange, which manages the country’s currency reserves.

Bridgewater created segregated investment portfolios for some clients that don’t allow any bets against the country’s currency, the yuan. In China, it is illegal for any domestic institution to speculatively short the yuan.

Some of Mr. Dalio’s “Principles,” the 123-page manifesto that drives the philosophy and management of Bridgewater, evoke Chinese history.

Some current and former employees say the practice of “radical transparency,” which requires most meetings to be recorded and employees to identify the weaknesses of other employees, reminds them of “struggle sessions” from the Cultural Revolution era, when Chinese citizens were encouraged to publicly criticize and punish one another.

At Bridgewater headquarters, Mr. Dalio created a team he named “the politburo,” a modified version of the ruling Chinese Communist Party’s domineering governing body of the same name.

The hedge-fund firm’s politburo included about two dozen top employees who adjudicated disputes and helped enforce Bridgewater’s rules. The group was recently disbanded.

Ray Dalio, far right, at a panel discussion about the Chinese economy at the World Economic Forum in January 2016. ‘We assess the leadership in China to be skilled,’ he wrote to Bridgewater investors last month.Photo: Matthew Lloyd/Bloomberg News

Bridgewater’s interest in China has been coupled with signs of wariness. When employees return to Westport from a trip to China, they aren’t allowed in the building until they turn over phones and laptops to security officers waiting outside the front door. The electronics are then destroyed because of security concerns.

In 2015, Mr. Dalio told Bridgewater clients that “our views about China have changed.” The Chinese government had just intervened in financial markets to counter a stock-market swoon. “There are now no safe places to invest,” he wrote in a research note.

After The Wall Street Journal published excerpts of the note, Bridgewater’s technology staff detected possible signs of a cyberattack on the hedge-fund firm’s computer systems. Employees suspected the possible involvement of Chinese hackers, though the perpetrators were never identified. Bridgewater concluded that no sensitive data was believed to have been stolen.

Mr. Dalio took a softer tone in a follow-up note, writing that China “has the resources and the capable leaders to manage” an economic restructuring.

Since then, Mr. Dalio has repeatedly instructed Bridgewater’s hundreds of investment researchers to be careful about writing outright negative outlooks about China, reminding them that he is sanguine about its long-term prospects. He also urged researchers to be aware of how their writing could be perceived if it were leaked outside the hedge-fund firm.

In the first paragraph of a note to investors in July, Mr. Dalio wrote: “We assess the leadership in China to be skilled.” A note to clients Thursday said China is “squeezing the bubble beautifully” as it adjusts its economy.

Mr. Dalio and Robert Prince, a Bridgewater co-chief investment officer, stayed at a Chinese presidential guesthouse during a visit to Beijing last year. When Mr. Prince came down with a sudden illness, Chinese government officials arranged treatment by a private, local doctor. Mr. Prince recovered.

Until recently, foreign financial firms seeking to do business in China were required to team up and split profits with a local partner—or work within tight restrictions. Now, though, Beijing is allowing foreign-based money managers operate independently in China to help it counter slower economic growth.

Ray Dalio at a state dinner for Chinese President Xi Jinping at the White House in September 2015.Photo: Andrew Harrer/Bloomberg News

Bridgewater is one of the first Western financial firms to seize the chance to go it alone in China. Its operations in the country are led by Wang Yan, a former Chinese naval submarine hunter hired by the hedge-fund firm in 2009.

Mr. Wang, who goes by the first name Ian, was among millions of urbanites sent under Chairman Mao Zedong to live in farming areas as part of a radical social experiment. Mr. Wang later attended college with many current Communist Party leaders.

He is known as a casual dresser who sometimes wears untucked, oversize shirts. He once pulled a copy of Mr. Dalio’s “Principles” from his pocket, quoting it aloud to a visitor. One person who has met with Mr. Wang says he “clearly has a view of China being a driver for the company.” Mr. Wang didn’t respond to requests for comment.

Bridgewater’s only office in China—or anywhere outside Connecticut—is on the 28th floor of the towering Shanghai World Financial Center, marked with a small sign. The hedge-fund firm is preparing to open its second Chinese office in Beijing.

For years, the Shanghai office was a hub for the hedge-fund firm’s daily research reports to clients. Bridgewater’s bets on the yuan and other assets were largely executed through financial instruments offshore. Bridgewater is a macroeconomic hedge-fund firm, meaning it places bets in anticipation of global trends like when a country’s currency will become stronger or weaker.

Bridgewater registered its name in Chinese as QiaoShui, a literal translation of the words “bridge” and “water.” It deposited millions of dollars in required capital and won approval for its largest fund to invest in China’s $9 trillion primary bond market.

To trade in local Chinese markets, Bridgewater is designing a new operation that focuses on Chinese securities. It is being created in the mold of Bridgewater’s low-fee All Weather portfolio, which follows a “risk parity” strategy and uses computer-driven bets. Mr. Dalio has much of his own net worth invested in the same strategy.

All Weather automatically buys and sells investments to maintain a balanced long-term strategy amid the market’s day-to-day ups and downs. Mr. Dalio has told people at Bridgewater that a mechanical investment approach that steers clear of active market speculation could be the most palatable to Chinese and international investors. In the future, he hopes to trade Chinese assets in the firm’s flagship hedge fund.

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