Forum Archive Index - April 2000

["Alan Gray" <loons@wave.co.nz>]

 

Today marked the end of an era in investing.

One of the most profitable and best-known global hedge funds in history
-- Soros Fund Management -- is history.

While the fund said today that it will remain in operation after a
"thorough reorganisation," make no mistake. It's over.

 

After 31 1/2 years of beating the markets in everything from stocks and
bonds to currencies and commodities, Soros came apart in a mere four
weeks, according to interviews with George Soros, his departing senior
portfolio manager, Stan Druckenmiller and other sources close to Soros.


The story of how that happened speaks volumes about the ability of the
market to surprise even the best traders, and the relentless pressure
of managing money in the most volatile financial markets we have ever
seen.

The beginning of the end was April 4. That was the gut-wrenching day
the Nasdaq Composite collapsed nearly 575, or 13.6%, before whipsawing
back up to close down only 1.8%. Druckenmiller came into that day
having already reduced the Quantum Fund's exposure to tech stocks in
February and March. He had expected a 10% to 15% slide from the Comp's
March 10 all-time high.

 

But he made a significant error in judgment on Tuesday the 4th. He
thought the V-shaped volatility of the day represented the end of the
10% to 15% correction in the Comp. Instead of dumping more tech stocks,
as he and his associates thought perhaps they should, he hung tight. He
could have sold tons of stock later that week as the market rallied.

Slam!The door to the exits slammed shut the next week, specifically on
Friday, April 14. The days leading up to that day were lousy, but
Friday was the kicker. The market crashed that day, and unlike Tuesday
the 4th, it did not snap back intraday. The Comp fell 10% and ended its
worst week in history down 25.3% -- 34.2% below its March 10 high.

The following Monday, Druckenmiller's associate, Nick Roditi, portfolio
manager of Soros' other big investment vehicle, the Quota Fund, told
associates that he was quitting the game. Not only was the London-based
trader leaving Soros, he was getting out of the money management game
altogether.

Why?

After all, he had previously experienced losing years interspersed
between great years when he made 100% to 200% on Soros' money. The
answer was that Roditi, whose trading style relies on enormous
financial leverage -- at times as much as 300% of the underlying
position -- was burned out.

Quota had suffered enormous losses the prior week. He just did not want
to do it anymore. He is rich. He has other business interests. He would
just as soon live in Africa, his homeland, as in London.

The End Is NearThe next day, Druckenmiller went into the firm's midtown
Manhattan office and announced to Soros that he wanted a break, a
sabbatical. The fund was too big and unwieldy. The year's gains tended
to come from just a few big bets each year. If one went wrong, they
could not get out. And the markets were more volatile than ever.

And even in the best of times, George Soros has never been known as the
easiest boss in the world. He is well-known for second-guessing his
portfolio managers, which is his right, because he has about $4 billion
in Quantum. It was not the first time that leaving had recently crossed
Druckenmiller's mind.

So why decide to step away on Tuesday, April 18th? After all, he was
down about this much last year at this time. He came back from that and
ended up garnering above a 40% gain for 1999. Why not one more time?
Because, apparently, he was just too tired to wage the relentless war
he knew it would take to recover.

Soros himself had initially considered coming back to take over.
Tensions were high at the prospect of the 69-year old speculator,
fearful of a market crash, without his top portfolio managers running
things again. After all, it had been 12 years since Soros has run money
himself.

An uneasy peace was maintained simply by their mutual needs to come to
an equitable arrangement. Soros did not want his top lieutenants
publicly cutting all ties to him and Quantum. And they wanted him to be
generous if they had to leave, now that the firm effectively was being
taken apart.

It was not until this week that Soros decided not to come back but
instead to make radical changes at his cherished firm. He decided that
Quantum will no longer seek 30% returns. (That explains its new, dowdy
name -- the Quantum Endowment Fund.)

He decided also that the management of Quota will be outsourced to
London-based money manager Michele Ragazzi of Newman Ragazzi. Soros
will offer his clients the opportunity to stay in the new Quantum and
Quota funds, but expects major departures. The firm already has raised
enough cash to pay off every single client who might want out.

It may be that the only client going forward will be Soros himself. He
already has decided to break up his money into smaller management
pools.

Look for him to spread the money among five to 10 managers, some who
now work for him and some who do not. The deals likely will be
structured so that in exchange for him dropping several hundred million
dollars on these managers and allowing them to take in additional
clients, he'll get a share of their management fees. If there is one
thing George Soros will not allow, it is for the market to take him out
-- i.e., lose all his money. The new, nimbler, more diversified
structure makes that less likely.

Much of the weakness in tech stocks in the second half of April may
have stemmed from selling pressure from Soros. In the third week of
April, they were blowing out many positions. The selling is over, which
may help explain the recent bottoming and rally we have seen in
technology stocks. Call it the Soros bounce.

Isn't it IronicThere is irony in Druckenmiller's departure. He made
many of his most spectacular calls by selling into bullish manias and
buying when there was panic. For example, he bought a ton of stock
after the October 1987 crash.

"This time," he said, "I overplayed my hand. I should have sold in
February. I sold some. I thought it was the eighth inning when it was
really the ninth."

"I had an exit strategy," he said. "I was two weeks off, too late. I
blew it. There was no exit. That was my biggest mistake."

After he leaves Soros in June, Druckenmiller will remain head of
Duquesne Capital Management, a small hedge fund he started before he
joined Soros.

Druckenmiller said that he has positioned Duquesne so that he can take
the summer off, and plans to take his family on a trip to Africa. He
said he will offer Duquesne's investors the opportunity to get out if
they like.

Don't expect too many Duquesne limited partners to leave. Druckenmiller
remains one of the best investors around.

Who knows, by Labor Day he might be back in business? As Druckenmiller
said today, investing is "like a drug." He is a known addict.