BETA
This is a BETA experience. You may opt-out by clicking here
Edit Story
Karen-Karniol-Tambour-1_2720x1275 undefined

Bridgewater’s New Brain: A Millennial Woman Is Blazing To The Top Of The World’s Largest Hedge Fund

I

n August, Karen Karniol-Tambour warned that the U.S. stock market was priced for perfection, making it vulnerable to the sort of sell-off that took place in October. While convinced that in the long term investors need more exposure to Chinese markets, as of late October she wasn’t bullish about China for the short term, either. “It’s a good time to be nervous about financial assets,’’ she says.

Unlike ordinary investors, Karniol-Tambour can do more than wring her hands. As head of investment research at Bridgewater Associates, the world’s largest hedge fund, with $160 billion in assets, she directs a 150-person operation that Paul Volcker has described as producing “more relevant statistics and analyses than the Federal Reserve.” 

Sitting in her small, spartan office at ­Bridgewater’s headquarters in Westport, Connecticut, Karniol-­Tambour unfolds an 11-by-17 sheet and waves it around. “The only piece of paper I have with me at all times—my current list of projects,” she says. No surprise she won’t share the 25 or so items on the list, but she gives a taste of their scope. One focuses on global impacts on emerging markets; another is creating leading estimates of inflation. While some inquiries will affect the firm’s current investment positions, others are aimed at building its understanding of long-term investment themes.

The projects won’t all get done by year’s end. “Our goal is to hit 70% to 75%, because if you want to hit 100% you probably are not being ambitious enough,” she explains. That comment offers a window into the demanding culture in which Karniol-Tambour has thrived, rising to research chief in 2017 at the age of just 31. That promotion made her one of the higher-profile women (and Millennials) on Wall Street.

Besides overseeing a third of Bridgewater’s investment professionals, Karniol-Tambour is one of only about a dozen people with full knowledge of Bridgewater’s secretive investment process. She reports directly to Ray Dalio, the firm’s billionaire founder, as well as its two other co-chief investment officers.

“Karen has intense curiosity, commitment to the mission and ­intellect,” Dalio says. “She’s like a vacuum cleaner of learning.” 

To hear Karniol-Tambour tell it, when she started Princeton at 17 she didn’t even know what a stock was. The grandchild of Holocaust survivors and the child of two professors (her mother in psychology, her father in aerospace engineering), she was born in Israel and grew up mostly in the seaside town of Netanya, with a two-year detour in the U.S. She excelled at computer science and physics but entered Princeton’s Woodrow Wilson school to study international and public affairs, an interest spurred by a Seeds of Peace summer camp she attended with Palestinian youth at age 14. (She now serves on the Seeds board and as a Millennium Fellow at the Atlantic Council.) A career in finance? No way. “I had a stereotype of people doing pitch decks,” she says. “I thought I would apply to be a professor like my parents.”

Karniol-Tambour is one of only about a dozen people with full knowledge of Bridgewater’s secretive investment process.

But at Princeton, Karniol-Tambour was introduced to a more intriguing side of the money world by her senior thesis advisor, Daniel Kahneman, the Israeli-American psychologist who won the Nobel Prize for his seminal work in behavioral economics. After graduation in 2006, she took a job at Bridgewater, where some friends already worked, figuring she’d stay two years before heading off to grad school.

Karniol-Tambour’s first assignment was bond research with Robert Prince, Bridgewater’s long-serving co-chief investment officer. He says he was quickly impressed by her ability to “connect the dots” on topics she knew little about. Just as quickly, Karniol-Tambour was smitten by Bridgewater’s brainpower and the immediacy of the markets. “I was drawn in by really intellectually curious people who literally wanted to get how things work,” she says. “The sense of impact was so massive, I loved the fact that if you had a good idea you could actually test it—demonstrate proof by using the market.”

In 2008, Dalio handpicked the then-23-year-old Karniol-Tambour, along with another colleague, to work with him on his thoughts about the financial crisis. Around the same time, she was branded an “idea generator” who could oversee her own research—the youngest person ever to get such responsibility at Bridgewater. Her work on risk premiums and discount rates helped lead to Bridgewater’s Optimal Portfolio hedge fund, launched in 2015, which manages $23 billion. 

Prince has told Karniol-Tambour he expects her to replace him some day. “She really is just getting started,” he says. “She is really smart, has great values and an engaging personality. You put those three things together, you get unique.” Dalio, too, ­praises Karniol-Tambour’s ability “to work well with others”—a bit surprising, given Bridgewater’s in-your-face corporate culture. Dalio built the firm around his “principles,” which promote radical transparency and the airing of disagreements as the best way to ensure good decision making. That approach, applied to an army of supersmart, ambitious and highly paid employees, makes for a confrontational workplace. 

“Amidst a brutally honest culture, Karen acts with kindness,” explains a former Bridgewater colleague. “Not to say she isn’t brutally honest, but what is so special about Karen is her motives are pure, and she cares about others and the firm.”

To hear Karniol-Tambour tell it, when she started Princeton at 17 she didn’t even know what a stock was.

Karniol-Tambour, for her part, frames the Bridgewater way as a clash of ideas, not egos. “I have had the ‘You need to call Ray at 10 o’clock at night and tell him his piece doesn’t make sense to you [moment],’ ” she says. “You need to value diversity of thought.”

Bridgewater trades in 150 markets around the world and a variety of assets, including stocks. But it is best known for trading and leveraging up government bonds in very liquid markets as well as the currencies in which those bonds are held, along with commodities trading. It is not a pure quantitative trading firm; instead it searches for economic and other signals, analyzes their fundamental basis and then turns that research into trading algorithms.

The approach has produced mixed results recently. Bridgewater’s main Pure Alpha hedge fund significantly trailed the U.S. stock market in 2017, even though it has generated a market-beating 11.7% annualized return since inception in 1991. Through late October, Pure Alpha had returned about 6%, beating the Standard & Poor’s 500.

Like others at Bridgewater, Karniol-Tambour tends to talk (and think) three-dimensionally. She draws a cube on a whiteboard, the only thing hanging on the wall of her office overlooking the Saugatuck River. The cube, she says, represents all the knowledge Bridgewater has accumulated over its 43-year history—knowledge that exists on its servers. Coordinates within the cube, she says, are where different investment ideas, including assets, countries or even concepts, can be located. Her job is to populate the cube with more data and knowledge. 

Every six months the investment pros at Bridgewater hold a brainstorming session to identify and prioritize their next research topics. It’s a democratic process—sort of. They vote on the topics, but the votes of the most senior people count more. Karniol-Tambour goes down the list staffing each project with the right people, until she runs out of analysts.

A big area of focus today is China. Karniol-Tambour believes that Asia in general, and China in particular, should play a more prominent role in investment portfolios in the future. China is opening up its onshore stock and bond markets to foreign investors, and given the size and importance of its economy, most global investors still underweight China, she says. Adding to China’s appeal right now, she notes, is that it’s the only significant market where a central bank is easing monetary policy. But China’s stock market has been battered this year. Plus, slowing Chinese economic growth and the presence of state-owned entities complicate investing. So short term, she’s not bullish on Chinese stocks.

Beyond China, much of Bridgewater’s research focus is international. Karniol-Tambour thinks the prospects for an all-out global trade war have diminished because of the U.S. trade deals with Canada and Mexico. She points to how the bond markets of smaller countries are more liquid today than they were just five years ago, making the Brazilian bond market, for example, more attractive to trade. One research project looks at big developed-market players who have only recently accumulated large emerging-market holdings and analyzes what might cause them to buy or sell. 

Even when assessing foreign markets, Karniol-­Tambour keeps one eye fixed on the U.S. It is, she notes, the epicenter of a big move by central banks to start removing the liquidity they have pumped into their economies for a decade. This tightening is reverberating across global assets, hitting areas most sensitive to it, including places outside the U.S. like Turkey, where banks rely on U.S. dollars.

What of prospects within the U.S.? Karniol-Tambour expects the fiscal stimulus from the Trump tax cuts to fade as the tightening of monetary policy continues. In August she warned Bridgewater’s clients that U.S. assets (particularly stocks), having recovered faster from the financial crisis than those in other countries, were priced for perfection and hence vulnerable. That vulnerability, she notes, was exposed a little by the October stock sell-off. 

“There is an extrapolation that the U.S. will keep outperforming for many years—decades,” Karniol-Tambour says. “European interest rates are not supposed to hit U.S. levels today in the next 10, 15 years. U.S. stocks are supposed to keep having higher profitability 10, 15 years. I look at that, and I say that’s pretty vulnerable.” With the U.S. priced to so vastly overperform, a little braking—say, the effects of the tax cuts petering out—could have a big impact. “You are vulnerable to that sort of correction,’’ she says. “There is risk in financial markets broadly because of this shift from an easing environment to tightening.” 

Reach Nathan Vardi at nvardi@forbes.com. Cover image by Franco Vogt for Forbes.