'Machine' Dalio takes on 'Man' Ackman

Ray Dalio, left, and Bill Ackman
Scott Mlyn | CNBC; Chris Ratcliffe | Bloomberg | Getty Images
Ray Dalio, left, and Bill Ackman

It's man versus machine when Bill Ackman meets Ray Dalio.

They are two of the most successful investors in the world, amassing billions of dollars in personal wealth through their hedge fund firms, $18.5 billion Pershing Square Capital Management and $160 billion Bridgewater Associates, respectively.

But their investment and personal styles couldn't be more different.

An activist, Ackman bets on a dozen or fewer companies at once, using his confident, emotional style to try to sway management or other shareholders. Dalio, by contrast, is cautious and mechanistic, relying on huge amounts of data to bet on broad macroeconomic forces and how they move about in 120 markets around the world, from currencies to gold to government bonds.

The disparity was on full display Thursday evening when Ackman interviewed Dalio at the Harbor Investment Conference, a charity event in New York organized by Ackman.

"I'm terrified. I'm a very risk-averse investor," explained Dalio, whose Bridgewater is the largest hedge fund firm in the world.

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Dalio addresses that fear, he explained, by letting algorithms do the work.

"When the mind can only process that one thing at a time, the ability to be able to use a computer to replicate the mind has been very helpful," he said.

He equates the economy to a "machine" that displays historical patterns that can be learned and then bet on. Humans often mess up investments, according to Dalio, because they are overly influenced by events in just their lifetime. Many of Dalio's 1,500-employee army—much larger than most hedge funds—work to improve Bridgewater's computer models by testing hypotheses about the markets.

Ackman, informed by a nine-person investment team, prefers big bets on unique situations where he can try to force change—from Herbalife to Target to Allergan—instead of using a huge diversity of positions to protect against broader economic forces.

"You use artificial intelligence. Hopefully, I use natural intelligence," Ackman quipped to laughs from the audience.

After Dalio described breaking down everything into investing "rules" through computers, Ackman interjected. "By the way," he said, "I invest exactly the opposite of that."

"I hire a great CEO. A good thing will happen," Ackman explained, referring to a common Pershing Square strategy.

"I'm much more qualitative," he added later about assessing good leadership. "I'm not confident I could look at a data stream and draw conclusions from it...I just don't have as much confidence in statistics."

Dalio tried to convince Ackman that their styles were actually similar. He said Ackman could break down the reasons for a company's or a person's potential and then use it as a screen for investments.

Ackman appeared interested but not convinced.

At one point he asked Dalio how he met his wife. Dalio said "passion," but Ackman shot back, "Have you quantified it?"

"I've thought about it," Dalio responded to laughs.

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Exceptional records

Both men have exceptional track records despite their divergent styles.

Pershing Square's International fund gained 1.61 percent net of fees this year through Feb. 3, following a monster 37.24 percent return in 2014. The fund has produced annualized returns since December 2004 of 17.71 percent, according to an HSBC Alternative Investment Group report.

Bridgewater's largest hedge fund, Pure Alpha II, gained 8.3 percent in January after rising 3.5 percent over 2014. The annualized return since inception in 1991 is about 13.5 percent, according to performance figures obtained by CNBC.com.

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