When Ray Dalio finally gave up the reins of Bridgewater Associates 18 months ago, he ceded control of the world’s biggest hedge fund to a younger generation. He also left behind a firm confronting restless investors after years of lackluster returns.

Chief Executive Officer Nir Bar Dea needed to revive a flagship hedge fund that was once the industry’s most profitable but has since lagged rivals. That meant shrinking the fund, cutting costs, firing longtime veterans, promoting other employees and revamping a culture that — depending on who was describing it — was either the firm’s great strength or a glaring weakness.

Bar Dea embarked on that effort in his first year as sole CEO, with a major management shakeup. He has taken steps to dial back some of the more unusual aspects of the firm — including nixing so-called baseball cards created by employees rating each other on their strengths and weaknesses.

Many executives within the firm applaud the changes, which they say were long overdue. After notching one of its worst annual declines since its 1991 start last year, Bridgewater's flagship Pure Alpha fund has rebounded almost 16% this year, according to people familiar with the matter.

Yet the turnaround has been tumultuous. Some investors, who asked not to be named discussing private deliberations, say they've been frustrated by lackluster returns going back years — including 2023’s loss — and are considering exiting the fund if performance falters again. They say they're frustrated after a leadership transition that took a decade longer than expected and featured seven different people holding the CEO title.

Hedge funds across the industry are grappling with life after their founders move on, including how closely to stick to the approaches that drove the firms’ success. That challenge is especially stark with Bridgewater and Dalio, whose personality stands out even in an industry rife with outsize egos. The 74-year-old billionaire is known for espousing “principles” for life and work, both in lengthy LinkedIn posts and a bestselling book, and for preaching a harsh management philosophy known as “radical transparency.”

Bridgewater declined to comment on its transition and performance. Details on restructuring over the past four years are based on interviews with 10 people familiar with the firm.

The flagship Pure Alpha fund — known as Pure Alpha II — lost more than 4% in the past four years, while its peers, as measured by PivotalPath’s global macro index, climbed almost 24%.

Some of its competitors marked double-digit gains last year, when Bridgewater’s Pure Alpha declined 7.6%. The fund’s performance in equities dragged down returns, according to people familiar with the firm. Investors have complained about a string of bad stock market calls.

The firm’s transition dates back to August 2020, even before Bar Dea became CEO, after losses early in the global pandemic added to years of underperformance. Senior management, including Bar Dea, had pushed to form an investment committee to oversee decisions, and Dalio moved to a mentor role where he no longer had a say over the portfolio. 

While the fund has posted brief periods of strong performance since then — including this year’s gains — the returns have been volatile.

In 2022 and 2023, Pure Alpha notched strong gains, only to reduce or erase them by December of each year. The year 2022 would have been one of Bridgewater’s best annual performances if it hadn’t been for a two-month rout at year-end. This year, the fund jumped 15.8% through March 26 — trouncing an index of macro funds.

But Bridgewater still needs to prove to its investors that it can sustain that performance — or at least avert losses and keep up with its peers.

While Bar Dea has made plenty of changes, he has preserved the essentials of the investing approach he inherited from Dalio. Money management is largely centralized and run by what Dalio called “timeless and universal” investment rules developed over decades and then plugged into a computer model.

The challenge, according to people with knowledge of the firm, has been to adapt the models fast enough. Markets get more efficient, and unforeseen events such as a worldwide pandemic or negative interest rates demand quick reactions. Bar Dea has responded by pledging to lean into AI and machine learning.

Employees have complained over the years because they wanted the models to be more dynamic, and they needed Dalio’s approval to alter them. He wasn’t always open to change, former employees said.

When the committee began handling investments in 2020, Bridgewater expanded the number of people who could see the entire model. Now more senior people were privy to ideas that were already in the system, so they knew what might be missing — making it faster and easier to make improvements.

In another break from convention, Bar Dea was instrumental in looking outside the firm for investment talent. In 2020, Bridgewater quietly started hiring seasoned fund managers to a platform called the Gate Fund, according to people familiar with the firm.

The portfolio managers were given small pools of money to trade based on investment theses they developed. Ideas that proved promising were researched further to ensure they held up and were scalable before being added to the system that runs Pure Alpha.

The experiment has produced mixed results. Of the six managers brought on, only two have produced ideas that were incorporated into the fund, according to people familiar with the program, which manages less than $750 million, or under 1% of Pure Alpha assets.

Bar Dea’s overhaul has stirred up some friction at the firm over who got promoted — and led to legal action.

As Bridgewater’s biggest fee-generating fund has shrunk, the firm has had to rein in costs. It said it would reduce 401(k) matches in years when performance lags. It also skewed senior investment professionals’ pay to align more closely with fund performance. While the firm made that change to incentivize senior staff, it also means Bridgewater will spend less on compensation during bad years.

The biggest and most public move to cut costs was firing 100 people, or roughly 8% of its staff, in March 2023, including veterans who had been with the firm for decades. In some cases, Bridgewater enforced a longtime policy of mandating two years of unpaid gardening leave even though employees didn’t choose to depart, according to people with knowledge of the firm.

Two of the fired employees — Paul Ross, who had worked at Bridgewater for almost 20 years and Jeff Gardner, who had been there for almost three decades — accused the firm of favoritism as well as age and sex discrimination after Bar Dea’s
former romantic partner and her ex-fiance were promoted in the shakeup.

Bridgewater hasn't commented on the contents of a court petition the pair filed seeking information from the firm in preparation for a possible suit. It filed papers earlier this month seeking to move the case to arbitration, contending the two were turning to the court and media for a “large payout.”

The firm said in the filing that Ross received three justifications in February 2023 for his termination, including that he didn't have enough experience as an investor and that his “multimillion-dollar compensation package could not be justified in light of the need to make reductions.”

Meanwhile, Bridgewater said Gardner was offered multiple positions at the hedge fund, but he turned them all down and “insisted on leaving" and demanded an “extremely large” severance payment.

The petition from the two men follows complaints Ross and Gardner made last year to senior management. Bridgewater hired an outside law firm to investigate Ross’s complaint — though not Gardner’s — and the review found it lacked merit.

"Bridgewater has refused to provide me the investigation report or even disclose any evidence refuting the specific factual allegations in my complaint," Ross said in a statement. He and Gardner have both requested new investigations.

Before they left, both also complained to senior management that the firm wasn’t doing enough to improve poor performance, which resulted in “strong negative reaction to their criticism,” according to the court petition, which they filed in February. They alleged their firing was in part in retaliation for these complaints.

Gardner also complained repeatedly about the impact of high transaction fees on performance, according to the petition, and questioned whether clients had been given “fair and proper” disclosure of those costs.

While the firm navigates its legal challenges, Bar Dea is pressing ahead with his plans. He expects to cut Pure Alpha assets further, which could result in fewer clients, according to people familiar with the firm. That would likely mean returning capital across the board or to certain clients.  

The firm’s assets have already dropped to $75 billion from a peak of around $100 billion. Soon, the world’s largest hedge fund might not have that label anymore — but if Bar Dea’s plan succeeds, it will be a better-performing one. 

This article was provided by Bloomberg News.