Page 70 - Ray Dalio - Principles

surest way of having a lot of upside without being exposed to
unacceptable downside.

As excited as we were about this new approach, we
proceeded cautiously. We gave the system a 10 percent weight

initially and it made money in nineteen of the twenty months
in our test period. As we got more confident, I decided to
reach out to a select group of investors I knew well about
investing in the strategy with $1 million trial accounts. I knew
that asking these institutional investors to invest such
relatively modest amounts would make it hard for them to turn

us down. I called the new product “Top 5%” at first, because it
comprised the best 5 percent of our decision rules; later I
changed the name to Pure Alpha to convey that it consisted
purely of alphas. Because Pure Alpha didn’t have any betas, it
didn’t have any bias to go up or down along with any market.
Its returns depended only on how good we were in
outperforming others.

Our totally new “alpha overlay” approach allowed investors
to receive the return of their chosen asset class (the S&P 500
stock market, a bond index, commodities—whatever) plus the
return from the portfolio of bets that we were making across
all asset classes. As unprecedented as our approach was, we
explained our logic carefully, showing why it was actually
much less risky than traditional approaches. We also showed

them how we expected the cumulative performance to unfold
and what the expected range of performance around that
would be. For our clients, it was a bit like being presented with
the design of a plane that had never flown before but looked
radically better than any other plane on paper. Would anyone

be courageous enough to get on board?