So Long, Soros: An Inside Look at the End of an Investing Era
By Brett D. Fromson
Chief Markets Writer
4/28/00 7:16 PM ET
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 reorganziation,"
make no mistake. It's
over.
George Soros
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.
See Also
The Worst Pain From Soros' Selling May Be Over
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 Near
The 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 Ironic
There 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. |
