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Sorrowful Soros and hedge funds topiary

By Neville Bennett

Friday 5th May 2000

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George Soros
The future of hedge funds is being questioned as Julian Robertson closes Tiger Management and George Soros announces the recasting of his Quantum Fund as a conservative, low-return and low-risk entity.

It is strongly ironic when two giant hedge funds pronounce modern markets as too volatile and risky.

Hedge funds became notorious when Soros combated the Bank of England in 1992. He made a billion dollars but forced the pound from the European exchange rate mechanism. He was credited with exacerbating the Asian Crisis by aggressively selling weaker currencies.

But it should be remembered too that Mr Soros has been perhaps the most successful money manager in history. His fund enjoyed 30%-plus returns for 31 years - a $100,000 initial investment would be worth $420 million today. Mr Robertson was no slouch either; he averaged 25% over 20 years.

Soros' panache will be missed. Most hedge funds look to make their money by arbitraging a very small profit for two interest rates or two exchange rates, whereas Soros leveraged his fund. That is, he borrowed as much as he could and then placed big bets. When some went wrong he shrugged his shoulders and placed more bets. And, of course, he won overall.

His undoing was the high-tech stocks on the Nasdaq exchange. The Nasdaq lifted about 80% in 1999 and Soros, with no great experience, committed his vast funds into tech stocks. It seems he bought when the Nasdaq was very high and also bought some ill-judged bargains. By March the fund peaked at $US12 billion.

When the Nasdaq dived the fund made horrendous losses because it had borrowed to buy shares. Mr Druckenmiller, who managed the Quantum Fund since 1989, confessed "the technology was just a mistake, we just overstayed our welcome." The fund has shrunk from $US12 to $US8 billion.

Mr Soros has decided the game is not worth the candle: "Our large macro bet days are over." He is now looking for a nice safe fund making about 15% maximum a year.

Mr Druckenmiller and portfolio manager Nick Roditi disagree and have resigned. The former does concede conditions are tricky: "I never thought the Nasdaq would drop 35% in 15 days."

Messrs Soros and Robertson are really saying the markets are out of control. They give some minor reasons for giving up, including a weak euro and the fund being too closely watched by the market.

Mr Robertson said he could not understand markets any more. Mr Soros said, "Markets have become extremely unstable and historical measures of value no longer apply." These are sobering thoughts for two renowned experts. Perhaps they should make everyone ask, "How safe are my investments?"

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