Billionaire Ray Dalio is best known as the founder of Bridgewater Associates, the largest hedge fund in the world, which manages over $160 billion in assets. But Dalio also has a lesser-known claim to fame: He helped facilitate McDonald's now-iconic chicken McNuggets.
Dalio recently shared the story of how he helped launch the McNugget with Stephen J. Dubner on an episode of the Freakonomics Radio podcast. Here's how it happened.
After graduating from Harvard Business School with an expertise in trading commodities in 1973, he worked on Wall Street for a few years before launching Bridgewater out of his apartment in 1975.
In his early days, Dalio had two clients, he tells Dubner: McDonald's and a chicken producer. McDonald's wanted to add a chicken nugget to their menu but feared that the price of poultry would skyrocket.
"There was a lot of volatility in the chicken market at that time and they were worried that if they set a menu price and the price of chicken then went through the roof that they would get squeezed or they'd have to raise the prices and it would be unstable," Dalio says.
McDonald's wanted to hedge the price of the chicken, which basically means it wanted to offset its risk in case the price were to change drastically. However, "there was not a way for them to hedge that, because there was not an adequate chicken market," Dalio says.
Dalio had to get creative to engineer a solution, so he went to the chicken producer directly with a pitch that would hedge the cost of producing the chicken instead. He argued that since a full-grown chicken was nothing more than a baby chick plus corn and soymeal, the prices of the grains were the volatile costs the producer needed to worry about — not the cost of the chicks.
"Ray suggested combining the two into a synthetic future that would effectively hedge the producer's exposure to price fluctuations," Bridgewater explained in an article about its All Weather investment strategy.
Dalio showed the chicken producer how it could lock down its production costs by buying corn and soymeal futures, which allowed the producer to offer McDonald's a fixed price for chicken.
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