Frank ---A good article for a morning like this---
The Wall Street Journal Interactive Edition -- January 6, 2000
Market Gyrations Rock
Soros's Quantum Fund
By MITCHELL PACELLE
Staff Reporter of THE WALL STREET JOURNAL
The world's best-known hedge fund jumped on the "new economy" bandwagon last year and made a bundle. Now it's finding the ride can be pretty bumpy.
George Soros's flagship Quantum Fund, taking a 180-degree turn, embraced highflying technology stocks in July, turning a 19% loss earlier last year into a 35% gain for all of 1999. The high-octane strategy for the $10 billion fund was concocted by Chief Investment Officer Stanley Druckenmiller.
The shift isn't looking so super now. In the past three days alone, Quantum Fund lost a total of about $600 million, or about 6%, according to someone familiar with the results. A spokesman for Soros declined to comment.
"We're getting killed today," Mr. Druckenmiller conceded early Wednesday afternoon. In December, he added, he had ratcheted down his technology bets a bit, although he won't say how much.
"Looking at the market right now, we are prepared to give back some of the money we made," Mr. Soros said during Tuesday's 5.55% drop in the tech-heavy Nasdaq Composite Index. "But hopefully we won't give" it all back. (Wednesday, the Nasdaq rebounded from heavy losses to post a decline of just 24.15 points.)
Quantum Is Battered by Bad Bet on Yen (March 11)
For now, the fund is sticking to its technology guns. "We're not bailing out. I reduced into strength," Mr. Druckenmiller said. "I have no compunction now to reduce into weakness. Indeed, if the market continues its downdraft, he added, "we'll be removing some of our hedges, rather than selling. I don't think you've seen the high for the year in the S&P or the Nasdaq."
"Last year's shift in direction by Quantum underscores the pressure many large institutional investors felt when their own returns began lagging far behind those of the momentum-investing crowd. Mr. Druckenmiller was among many money managers who piled into hot tech stocks last year as their prices shot up, driven by strong demand from individual investors.
"If defensive value stocks like Waste Management can go down 50% to 60%, at least I should buy something that could go up 50% to 60%," Mr. Druckenmiller recalled thinking. "If someone wants to say we're joining the momentum guys, that's fine. It's our job to figure out how to make money."
The fund's sudden immersion in the technology sector drew the attention of Wall Street because of the high regard many investors have for the investment prowess of Messrs. Druckenmiller and Soros. Quantum, launched in 1969 and open only to non-U.S. investors, is a "global macro" fund that plays stock, bond, commodity and currency markets world-wide. Hedge funds like Quantum are private investment partnerships for the wealthy and for institutions. Quantum has shown an average annual return of 32% over its lifespan.
But in recent years, Quantum's returns have been mediocre. In 1998, it returned just 12.4% after fees, compared with a 26.67% gain for the S&P 500 index. On April 12, the then-$7 billion fund's decline reached 19.1%, and Mr. Druckenmiller fretted that he was one mistake away from disaster. Quantum's woes, coupled with steep losses at Julian Robertson's Tiger Management, had some hedge-fund investors wondering whether the heyday of the large "global macro" funds was over.
It's not that Quantum had been avoiding technology stocks. In the summer of 1998, Mr. Druckenmiller attended Allen & Co.'s annual summit conference of corporate chieftains in Sun Valley, Idaho. "I decided I was a dinosaur," Mr. Druckenmiller recalled. "I was too old to understand the new economy." He decided to focus on placing "macro" bets on global currency and bond markets, and to turn over the U.S. stock portfolio to an associate, Scott Bessent.
Quantum then set a two-part technology strategy: invest in companies like Sun Microsystems, which were providing infrastructure for the Internet, and bet against second-tier e-commerce stocks, selling their shares short, said Mr. Druckenmiller. Short sellers sell borrowed stocks, hoping to replace the shares later by buying at lower prices.
But global market turmoil in late 1998 turned Mr. Druckenmiller bearish on stocks, prompting the sale of much of the fund's tech holdings, leaving the short positions. When Internet stocks rallied in early 1999, the fund lost $700 million, or about 10%. "We just got annihilated," recalled Mr. Druckenmiller. To make matters worse, his bet on a strong euro cost the fund another $500 million.
"I've been through tough periods," said Mr. Soros, citing one point in 1981 when his fund was down 27%. "But for Stan, this was his toughest period." In April, Mr. Soros made a rare appearance at a weekly meeting of Quantum analysts. "We all know things have not been going well," he told them. "But we've had bad times before. We'll come out of it."
On July 7, with his organization in chaos and pressure mounting, Mr. Druckenmiller flew to Sun Valley once again. That very day, Waste Management, one of Quantum's largest holdings, badly missed its numbers, causing its shares to plunge 37% in a single day.
With that "body blow" fresh on his mind, Mr. Druckenmiller listened to a speech by Intel Chairman Andrew Grove. "Ross Perot was right about the giant sucking sound, but wrong about Mexico," Mr. Druckenmiller recalled Mr. Grove saying. "It's the Internet." Mr. Grove predicted that within five years, any company that had not gotten involved in the Internet would be out of business.
"After the talk, there was a guy who said this was Internet for idiots," said Mr. Druckenmiller. "I said it was perfect for me." In fact, Mr. Druckenmiller went straight to the phone and bought Sun based on a comment by Mr. Grove about a looming bottleneck in Internet growth due to server capacity. More significant, Mr. Druckenmiller decided he could no longer afford to be a "dinosaur" on the "new economy," because it was affecting even the global currency and bond markets.
When he returned to New York, he told Mr. Soros he had done "a lot of soul-searching" and had decided to take back control of all U.S. stock-picking. "There is this exciting thing going on out there that we were missing," he told Mr. Soros.
He immediately dumped as much Waste Management stock as he thought the market could bear -- about eight million shares. "They were horrible sales," he recalled. "But I didn't care." Waste Management's plunge ultimately cost the fund about 5.5%. He also got rid of other value stocks such as Caterpillar.
The fund bet on wireless communications, such as South Korea's SK Telecom, Japan's NTT Mobile Communication Network, China Telecom and Texas Instruments, which make semiconductors for wireless products. The fund also bought cellular-technology stock Qualcomm, Veritas Software and JDS Uniphase.
Quantum shorted companies that Mr. Druckenmiller believed would be hurt by either a Federal Reserve tightening or competition from Internet companies. These included supermarkets, banks and traditional retailers.
Through the summer and early fall, Quantum gradually erased losses, ending September down 6.2%. In October, convinced the Fed would hold off further tightening, Mr. Druckenmiller was convinced the Nasdaq would take off, he says. He unwound some of the fund's short positions, and added to its technology positions using borrowed money. When he was done, he had transformed the portfolio from net short to more than 100% of its value in stocks, an extremely aggressive position for a large macro fund. When he was done, technology positions accounted for more than 25% of the fund's value.
Returns soared. Quantum ended November up 9%, and ended 1999 up 34.7%.
By mid-December, Mr. Druckenmiller said, the fund had started to trim some technology positions, although he won't say which, and by how much. He also re-established more short positions, including significant bets against the S&P 500 index and the bond market.
This week, the fund has made money on its bets against the bond market and the S&P 500 index, he said. At the same time, Quantum holdings like Qualcomm, Veritas and NTT Mobile have been big losers in the past few days. Mr. Druckenmiller declined to quantify those losses. But he noted that the fund pared some positions in December, and said it has "gotten our cost -- and then some -- out of Qualcomm," and continues to hold a significant position.
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