Volatile Market Forces Soros to Scale Back Risk in Quantum Fund
George Soros, the billionaire investor who became notorious for his swashbuckling and often controversial investment style in stock and currency markets worldwide, said Friday that he is restructuring his firm after suffering heavy losses this month on sagging technology stocks.
In a letter to shareholders, the famed speculator announced the departures of two top aides who had managed most of the firm’s assets, including longtime lieutenant Stanley Druckenmiller, and said he is scaling back to a more conservative investment approach.
The flagship $8.2-billion Quantum fund piloted by Druckenmiller is down 22% this year after absorbing sizable tech-stock losses.
To be sure, Soros’ tech-stock setback is far from catastrophic, and the reorganization of his firm is voluntary. In fact, it was prompted in part because Soros’ past success had lured so many investors that his funds grew too large to dart around nimbly in pursuit of fast-breaking market trends.
“He’s a victim of his own success,” said Meredith Jones, research director at Van Hedge Fund Advisors International. “He has navigated the markets exceptionally well.”
Through 1999, Quantum returned an impressive 32% annually from its inception 30 years earlier, helping the $14.4-billion Soros Fund Management become the world’s largest hedge-fund complex.
Nevertheless, several Soros funds that were famous for wagering on broad economic trends such as currency and interest rate movements were forced to venture aggressively into tech stocks in mid-1999 to combat dismal performance early in the year, experts said.
The firm, though, is not known for tech investing, and was apparently unprepared for the sector’s violent fluctuations.
“[Soros] paid the piper because he really underestimated the volatility,” said Bruce Ruehl, managing director at Tremont Advisers, a hedge-fund consultant. “These guys went into areas where they were not really experienced in the pitfalls.”
Said Soros in his letter: “Markets have become extremely unstable and historical measures of value at risk no longer apply.”
Soros’ decision to revamp his firm underscores the enormous risks taken by hedge funds, which are largely unregulated investment firms that pool the money of wealthy investors to make aggressive bets in financial markets around the globe.
Hedge funds frequently borrow heavily to juice up their returns--and endure magnified losses when their bets go awry. The Long-Term Capital Management hedge fund nearly collapsed in 1998 because of wrong-way investments that forced the Federal Reserve and major Wall Street firms to cobble together a $3.6-billion bailout.
While Soros is downshifting his aggressive style, hordes of individual investors have piled into risky tech stocks, experts note. However, it’s unclear whether Soros’ decision was spurred by fear of a deeper market decline ahead, or simply by a lifestyle choice by the 69-year-old Hungarian native.
“He could be very prophetic and taking a preemptive move against where he thinks the market is going to go,” Jones said. “Or it could just be a reaction to how his particular investment strategy interacts with the market.”
Soros stepped back from day-to-day management of the funds in 1989 to concentrate on his vast philanthropic activities. Some analysts expect hefty investor withdrawals with the exit of Druckenmiller and Nick Roditi, manager of the $1.2-billion Quota fund, who together managed about two-thirds of the firm’s assets.
Soros becomes the second high-profile hedge-fund manager to step out of the limelight recently. Last month, Julian Robertson, whose Tiger Management was the second-largest hedge-fund group, said he was shutting his funds.
Robertson, a traditional “value” investor who favored stocks with low valuations relative to earnings, lamented that he couldn’t make sense of the soaring prices of so-called new economy stocks.
Robertson’s and Soros’ recent problems in the market are far from identical, experts pointed out. Robertson refused to wade into tech stocks, while Druckenmiller and Roditi, after profiting nicely from techs last year, were burned when they held on too long.
However, their cases are similar in that both showed an inability to come to terms with today’s wildly gyrating stock market, Ruehl said. They counted on stocks to trade according to historic Wall Street patterns, which has not been the case as small investors have flooded in as never before.
“These markets now, particularly in tech stocks, are not driven by the pros--they’re driven by individuals, whose behavior is not ‘normal’ compared with the pros,” Ruehl said. “I’m still not convinced that individuals won’t pay the price at some point. But so far, they’ve gotten it more right than the pros.”
Also, Soros and other hedge funds that wager on economic trends have simply made wrongheaded bets in recent years, Ruehl said. Many expected a rally in the long-suffering euro that has yet to materialize, and failed to profit from a boost in oil prices, he said.
The size of Soros’ firm gave him a global cache, but it also made him a lightning rod for criticism.
In 1997, Malaysia’s prime minister accused Soros of setting off the chain of currency devaluations that lay behind the Asian financial crisis. Mainstream financial experts dismissed such notions, and said that hedge funds can sometimes have a salutary effect on the markets by taking contrarian positions that cushion the effect of sudden market swings.
Indeed, experts predict little impact on markets from Soros’ announcement. It is likely that Soros sold many tech stocks before Friday’s announcement, thus preventing a forced liquidation in coming weeks, they said.
Druckenmiller and Roditi have amassed enormous personal fortunes--estimated between $100 million and $500 million each--and may simply have grown weary of answering to shareholders who have been spoiled by years of generous returns. “The realized they had a great run and they’d gotten out of sync with global opportunities and it was time to change the firm,” Ruehl said.
