Sandra Navidi - SuperHubs - How the Financial Elite and Their Networks Rule our World

His highly respected and widely read investment outlook in 2014, the year of his departure, was essentially an ode to his recently deceased cat, Bob. Fittingly, it was simply titled “Bob” and contained such interesting tidbits as, “Aside from sleeping, Bob loved nothing more than to follow me from room to room making sure I was OK. It got to be a little much at times, especially when entering and exiting the shower.”26 One might wonder how Bob’s stalking might have been relevant to the bond markets, but if nothing else, Mr. Gross’s remembrance served as an indicator of his sophisticated ability to build rapport with cats. In contrast, his interactions with humans, at least in the later stages of his career, left much to be desired.

Gross founded PIMCO, which is located in Newport Beach, in 1971 and was instrumental in its spectacular growth to $2 trillion under management. The bulk of investments came from institutional investors, and he has managed many ordinary Americans’ money via pension funds and insurance plans. Gross, driven by a desire to beat the system, revolutionized bond trading and generated unprecedented profits. He combined quantitative skills with the ability to make accurate macro calls on the economy, including the subprime mortgage crisis of 2008, and managed to consistently predict interest rate movements ahead of his peers. Over the course of the financial crisis, however, as central bank actions skewed the markets, his bets turned out to be increasingly incorrect. Performance slipped, and investors withdrew billions of dollars.

For the “bond king,” who had been spoiled by extraordinary success throughout his career, the experience was sobering, and confrontations between Gross and his staff grew more acrimonious. Reports from inside the firm described his management style as authoritarian and autocratic. Purportedly, he grew hostile toward more successful traders, and colleagues were forbidden to question his trading strategies. A derisive email to senior colleagues was leaked in which he openly berated one who had executed a decision that he himself had made. He voiced irreverent statements such as, “I’ve made you all rich . . . see how you do without me,” and repeatedly threatened to do the unthinkable: quit.27

Perhaps most significant, Gross became more confrontational with his designated successor, Mohamed El-Erian, a highly respected, soft-spoken economist, who in many respects is his antithesis. When Gross accused El-Erian of trying to undermine him, people began to perceive him as paranoid. Such airing of dirty laundry is a violation of the implicit code of conduct and pretty much unprecedented among superhubs. El-Erian, who had until then been assumed to take Gross’s leadership, abruptly resigned in early 2014, which caused a medium-sized earthquake among investors. He subsequently explained his move by claiming a desire for a greater work-life balance and more time with his family.

After the popular El-Erian’s departure, the animosity and alienation between Gross and the rest of the team escalated, and management asked him repeatedly to return to a more amicable demeanor. Eventually, colleagues staged a coup d’état. A couple days before the planned announcement of his ouster, he beat management to the punch, giving his resignation and joining Janus Capital, a much smaller and lesser-known company. The fallout was humiliating for Gross, and the fact that billions of dollars immediately followed him out the door likely did not lend much satisfaction. The sudden withdrawal of huge amounts of money placed PIMCO in crisis mode, and regulatory authorities were concerned about a potential destabilization of bond markets. Their concern illustrated the power that one person can have over entire markets.

Gross successfully cultivated an image of a celebrity investor, primarily by the canny use of the media and particularly business TV. In a sea of monotonous suits, Gross’s casual, zenlike, Californian style coupled with his unconventional remarks (in 2007 he compared the appeal of mortgage-backed securities to that of “six-inch hooker heels” and a “tramp stamp”) provides great entertainment value.28 Over time, he achieved gurulike status with a significant following. His word became law, and since his fund was so enormously big, it did not simply invest in the market but was a major part of the market itself. Being a superstar-brand/investment manager makes it much easier to raise assets because of the name recognition and the fact that, from a professional investor’s point of view, if one’s peers all are investing in PIMCO as well, it provides cover in case something fails. But having a branded star manager who is synonymous with the fund also highlights the perils of key-man risk. So what is the moral of the story? Even the most talented fund manager must employ a minimum of interpersonal skills and build a network of loyal supporters to call in favors, accumulated in the form of social capital, when the time comes.

ON A MONOMANIACAL MISSION: RAY DALIO

Another common superhub trait is an ability to focus excessively on one idea. Perhaps Elon Musk’s ex-wife, Justine, put it best when she said that “extreme success results from an extreme personality.” But their chief characteristic, according to Justine, can be summed up in two words: Be obsessed. “People who are obsessed with a problem or issue can work through all the distractions and barriers that life puts in their way. And that obsession needs to be your own, to the point where it borders on insanity.”29

One superhub with an extreme focus is eccentric money manager Ray Dalio. At the WEF in Davos, banks, corporations, and countries all host parties on Friday night, competing for high-profile guests. Over the last few years, the party of Russian oligarch Oleg Deripaska, who in 2015 was the fifteenth-richest person in Russia, has become a staple on the party circuit. The invitation-only event attracts all the elite WEF attendees. Deripaska’s blue-lit chalet is inconveniently located off the beaten track on the top of a hill, so guests must make an extra effort to get there. Once inside, they are greeted with endless streams of the finest champagne, vodka, and Russian caviar amidst dancing Cossacks and beautiful Russian models. It was there that I first met Ray Dalio, who was standing to the side, all by himself, serenely observing the scene. We chatted for a while and exchanged business cards before he hurried off to his private plane jetting back to New York.

The tall, slightly gaunt, and friendly-looking Dalio is not well known to the general public, although he should be, because he runs the largest hedge fund in the world, with over $150 billion under management. Bridgewater’s investors are institutions such as pension funds, insurance companies, and endowments, which in turn manage the savings of millions of ordinary people, therefore indirectly exposing them to Dalio. Mention his name to Wall Streeters, and their eyes begin to glow. His long track record of success, idiosyncratic investment approach, and pursuit of excellence evoke great admiration and respect amongst his peers and those who aspire to rise to his station. Unlike many of his fellow asset managers, Dalio has until recently chosen to remain under the radar.

Dalio invests on the basis of macroeconomic trends. His rigorous analysis, disciplined investing, and consistent performance have garnered the attention of many sophisticated investors. Dalio showed great foresight when he warned of the financial crisis well in advance and throughout it outperformed the market when many other funds faltered. Like many successful billionaire money managers, he is not primarily motivated by money, and unlike most of them, he lives rather modestly. Bridgewater’s offices are located near his home in Westport, Connecticut, surrounded by old trees and lush bushes. He recently joined the Giving Pledge started by Bill Gates and Warren Buffett, committing at least half his fortune to philanthropic causes.