"Soros to Appoint First CEO
To Steer Hedge-Fund Firm" (wsj.com/section C1)
August 10, 1999
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Soros to Appoint First CEO
To Steer Hedge-Fund Firm
By MITCHELL PACELLE
Staff Reporter of THE WALL STREET JOURNAL
Financier George Soros is shaking up operations at his hedge-fund firm, after a chaotic year marked by personnel turnover and losses at its flagship Quantum Fund because of bad bets on Internet stocks and the euro currency.
Soros Fund Management, which manages $13.2 billion for wealthy offshore investors, is expected to announce Tuesday that former Bankers Trust Corp. Treasurer Duncan Hennes, 42 years old, will become the firm's first-ever chief executive officer.
The move is intended to free up chief investment strategist Stanley Druckenmiller of management responsibilities so that he can concentrate on managing the $6.7 billion Quantum Fund.
"We are very concerned about both" investment performance and personnel management, said Mr. Soros. "We are trying to address both. The size of the fund, and the range of responsibilities, it was too much for one man," he said, referring to Mr. Druckenmiller.
Mr. Druckenmiller, 46, who was tapped by Mr. Soros a decade ago to run Quantum, said that "administration has occupied more and more of my time as the firm has grown. This should enable me to refocus my efforts entirely on the performance of Quantum."
Quantum, launched by Mr. Soros in 1969, is one of the oldest and best-known hedge funds, although as an offshore fund it isn't open to U.S. individuals. But its investments are closely watched by other investors, a measure of the regard in which Mr. Soros, and more recently Mr. Druckenmiller, are held by other investors. Through the early 1990s, Quantum logged an extraordinary run of beating stock, bond and currency markets, boasting a 69% return in 1992, after fees, and a 63% return in 1993. Last year, Quantum rose 12.4%, after fees, underperforming the overall market but still outperforming many large funds during one of the hedge-fund industry's most dismal years in memory.
But this year Quantum has struggled mightily. After declining about 19% earlier in the year, it has bounced back to a loss of 11.2% through Aug. 4, compared with double-digit percentage gains for the Dow Jones Industrial Average and the Nasdaq Composite Index. Mr. Druckenmiller's worst previous year had been a loss of 1.5% in 1996. "This year's performance has been absolutely horrendous, although it feels a lot better being down 11% than 19%," said Mr. Druckenmiller.
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A disastrous bet against Internet stocks earlier this year cost the fund about 10% of its assets, or roughly $700 million, said Mr. Druckenmiller, who explained that Quantum had sold short shares of a number of second-tier Internet companies. Those shares subsequently rose sharply in value, and Quantum lost money unwinding the bets, although it recovered some in a more recent, smaller bet against the sector. Mr. Druckenmiller declined to identify the stocks.
"After having made money in the Internet pre-January, 1999, on the long side, we were too early in calling the bursting of the Internet bubble," said Mr. Druckenmiller. "And more importantly, our positions, in hindsight, were way too large for the risk. We totally underestimated the risk."
Quantum was also hurt by betting on the strength of the euro, Europe's new common currency, which has declined steadily in value since its introduction in January. That position cost the fund more than 7% of its value, according to someone familiar with the position.
More recently, Quantum was hurt by having 10% of its capital in Waste Management Inc., whose shares plunged in July after it slashed earnings estimates, dismissed its chief financial officer and general counsel, and said it planned to sell assets.
Quantum's performance problems sparked something of a housecleaning on the stock-investment side of the business. A year ago, Mr. Druckenmiller had begun delegating more of the U.S. stock-investment analysis, while he concentrated more on "macro" currency and bond trading, according to people familiar with the fund. In recent weeks, however, he dismissed a half-dozen analysts, and refocused on management of Quantum's U.S. stocks, these people say.
Monday, Mr. Soros characterized last year's decision to have Mr. Druckenmiller spend less time on U.S. stocks as "a mistake."
Earlier this year, Mr. Druckenmiller asked Mr. Soros to consider bringing in another executive to handle the business side of the operations.
Mr. Hennes, a highly regarded former Bankers Trust managing partner who had served as both treasurer and global head of trading and sales, was one of several senior executives who appeared to have no place at the bank after its June 4 acquisition by Deutsche Bank AG. He left at the time of the merger.
Mr. Hennes will report directly to Mr. Soros, and will oversee hiring and firing, compensation and other aspects of running a business that has grown to include about 200 employees and affiliated offices in Tokyo, Hong Kong and London. Although he won't be involved in the investment decisions of Quantum, he will oversee the new people Quantum intends to hire in the arbitrage area.
"It's going to end up being a partnership among all of us getting the house in order and expanding the franchise over time," said Mr. Hennes.
Mr. Druckenmiller explains: "If and when we get our current house in order, which is his first priority, the thought is that Duncan will be able to leverage the firm's reputation to attract talent and grow in other areas."
Quantum's problems have affected the price at which investors are able to sell their Quantum units in the secondary market for them in London. In years past, the units have fetched a premium to the net asset value of the fund. But in February, they fell to a discount, and investors who wanted to get out had to accept a 2% discount to net asset value. Investors are currently being offered a 1% discount.
Last October, turmoil also engulfed two other hedge funds run by Soros Fund Management. Mr. Soros abruptly announced plans to shut down his $1.5 billion emerging-market hedge fund, and told investors in his Quota Fund, then down 14%, that its chief adviser, Nicholas Roditi, was taking a temporary medical leave. But in January, he reversed course on the emerging-market fund, opting to leave it open, and Mr. Roditi returned.
Quota, which has $1.9 billion under management, is up 9.8% through Aug. 4. Quantum Emerging Growth, the $1.4 billion emerging-markets fund, is up 16.4%. Mr. Soros's $2.75 billion private-equity fund, Quantum Industrial Holdings, is down 5%, while Quantum Realty, a real-estate fund, is off 2%.
In May, three veteran merger-arbitrage specialists announced they were leaving Quantum to start their own fund. Lief Rosenblatt, Mark Sonnino and Gabe Nechamkin, senior members of the "special situations" investment group, are now attempting to raise money for Satellite Asset Management. Defections have long been a regular event at the best-known hedge funds, as sharp young managers opt to strike out on their own.
Quantum's performance problems, together with the uncertainty at Quota, dividends paid out to fund investors, and cash-outs by some investors, have eroded the total capital being managed by Soros Fund Management from about $22 billion at its peak last year to about $13.1 billion today
Write to Mitchell Pacelle at Mitchell.Pacelle@wsj.com
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