3 Reasons Ray Dalio’s Exit Package Should Raise Eyebrows

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  • Ray Dalio’s exit package is potentially equivalent to the gross domestic product of Belize.
  • Hedge funds aren’t worth their ridiculous fees. 
  • If Principles were a competition, Warren Buffett’s got Ray Dalio beat by a country mile.  
Ray Dalio - 3 Reasons Ray Dalio’s Exit Package Should Raise Eyebrows

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Billionaire hedge fund legend Ray Dalio retired in grand style in October from Bridgewater Associates, the company he founded in 1975 from his two-bedroom apartment, says a February report from The New York Times.

According to the paper, the billionaire’s controversial comments about China’s human rights violations accelerated Dalio’s departure from Bridgewater. However, his departure had been in the works for many months before the remarks were uttered.

The issue holding up Dalio’s grand departure was the amount of money he would get in his exit package from his two successors and the company itself.

Dalio, worth approximately $22 billion, is the author of a series of books focused on one’s principles. So it is ironic that the only way he’d go quietly into the good night, surrendering control of crucial decisions, was by creating a class of shares that could amount to billions of dollars over the next few years.

For a man so focused on transparency and principles, there are three reasons why Dalio’s exit package hardly seems to be either.

Dalio’s Exit Is a Platinum Parachute

Hands and Dollars
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Former Secretary of Labor Robert Reich, who served in the Clinton administration from 1993 to 1997, publishes a blog on Substack that I often read. Funnily enough, he wrote about this subject in a 28 February blog post after I’d decided to write about Dalio’s greed.

It could be the best piece of his I’ve since stumbling onto the blog several months ago. He hits the nail on the head on several occasions.

For example, Reich discusses how Dalio wrote about reforming capitalism in 2019, but points out that the hedgie had no solutions.

“To the best of my knowledge, he hasn’t supported a wealth tax or any tax increase on people like himself,” Reich wrote. “He hasn’t proposed stopping giant hedge funds and private equity funds from forcing companies to squeeze out every ounce of profits, typically by suppressing wages and abandoning workers and communities. And he certainly hasn’t proposed capping executive pay.”

Is it surprising that a man worth $19 billion who had no problem grabbing billions more on the way out wouldn’t have a solution for narrowing the wealth gap in this country? Principles, my arse.

His exit wasn’t gold-plated; it was platinum-plated.

He shames regular CEO exits like Jack Welch’s $417-million package. If I were a Bridgewater client, I’d most certainly want some sort of fee rebate for his generosity.

It’s an Insult to Bridgewater’s Pension Clients

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Among the various compensation arrangements hedge funds charge their clients, the most common comes with a 2% investment management fee and a 20% performance fee for any investment gains. As a result, it’s often referred to as “2 and 20.”

According to Reich, this compensation system is why there are more than 10,000 hedge funds worldwide. Interestingly, Yahoo Finance published an article in December highlighting the world’s 15 richest hedge fund managers.

The average net worth of this exclusive club was $21.4 billion, with Ray Dalio in fourth spot at $22 billion. Warren Buffett was listed first at $118 billion. I find that finding to be offside; Buffett’s firm, Berkshire Hathaway (NYSE:BRK.B), charges no fees, making it one of the best investment funds a regular investor can own. But I digress.

The former Labor Secretary rightly points out that many of the hedge funds’ pension fund clients serve the retirement needs of school teachers, cops, firefighters, and many other public service employees. Yet, they pay a marginal tax rate of 25%, while hedge fund managers like Dalio pay just 15% on their capital gains.

The rich get richer.

If hedge fund managers are worth their weight in gold, it’s hard to understand why they charge a management fee in the first place. Of course, they should have performance pay over a particular hurdle, but to correct the tax act’s inequities, the performance fees should be considered income, not capital gains.

Simple.

On a Relative Basis, Warren Buffett Works for Free

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Berkshire’s 2022 proxy states that Warren Buffett (CEO) and Charlie Munger (Vice Chairman) both had a salary of $100,000 in 2021. Buffett also had other compensation of $273,204, and that was for security services for the Omaha billionaire.

According to the Times, Dalio earned $2 billion in 2021 on the back of a 14.8% return for Bridgewater clients. In 2017, he made a more pedestrian $1.3 billion. In 2011, he earned a whopping $3.9 billion.

How somebody makes that kind of money worth only $22 billion (I say that with my tongue firmly planted in my cheek) is beyond me.

Let’s get this straight.

In 2021, Berkshire Hathaway’s stock appreciated by twice the amount of Bridgewater’s return (29.6% vs. 14.6%), yet Buffett made 0.02% of Dalio’s haul on the year. So it’s clear it pays to remain a private company.

Even Greg Abel, the head of Berkshire’s non-insurance operations and the named successor to Buffett, only made a little less than 1% of Dalio’s lucrative compensation in 2021. And I’m pretty sure Abel worked a lot harder for his money.

Essentially, Buffett worked for free relative to Dalio’s ridiculous compensation.

Once upon a time, I thought about reading Dalio’s first book, Principles, but the fact he potentially extracted billions from his own company as an exit package tells me he has none.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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