Soros Fund Management LLC runs a group of pools of money, called hedge funds, that trade in an array of financial instruments for the benefit of individuals and pension funds with the resources to take risks in the expectation of realizing great rewards. Soros Fund Management operates the Quantum Group of Funds, which had gross assets of $21.5 billion in 1998, more than any other hedge-fund group. So spectacularly did the company perform for its clients that $1,000 invested in 1969 with George Soros, the founder, would have been worth about $2.15 million in 1995 if all the dividends were reinvested. "No other investor has produced better results for such a long period," said Business Week in 1993.
Outwitting the Markets: 1969--80
Born in Hungary in 1930, George Soros avoided deportation and probable death in World War II because his Jewish family hid from the invading Germans. He moved to England in 1947 and graduated from the London School of Economics before becoming a trader for an investment bank. In 1956 he moved to New York City, where he became an analyst for European securities. He became a director of a new offshore fund in 1967 for the firm Arnhold & S. Bleichroeder.
In 1969 Soros started the Double Eagle Fund for Bleichroeder with $4 million in capital, including $250,000 of his own money. This hedge fund was also offshore, meaning its nominal base was outside the United States, on the island of Curaç in the Netherlands Antilles. This meant it was free from U.S. capital gains taxes and most federal regulations, but none of the investors could be Americans except Soros himself (who became a U.S. citizen in 1961). The minimum investment, in 1981, was $100,000.
Established in 1949, hedge funds got their name from their practice of buying stock on margin (that is, partially through a loan) and countering such an investing position (going long) by selling stock not already owned for delivery at a later date (selling short). They also used instruments such as options and futures contracts both to maximize their potential profits and to offset their risks. Another characteristic of hedge funds was that their managers were compensated mainly on the basis of performance rather than by a fixed percentage of the assets under management. Double Eagle traded in all financial markets, including currencies and commodities as well as stocks and bonds.
Soros and his assistant, Jim Rogers, left Bleichroeder in 1973 to start Soros Fund Management, a private partnership with only one employee, a secretary. The management team reserved for itself 20 percent of the profits from what was renamed the Soros Fund, with Soros receiving four-fifths and Rogers the remaining one-fifth. Soros's readiness to sell stocks short in a period of rising inflation and oil shortages enabled his fund to far outstrip the typical mutual fund. "We start with the assumption that the stock market is always wrong," Soros told a Wall Street Journal reporter in 1975. Soros Fund Management also looked beyond the United States; in 1971, for example, one-quarter of the fund's portfolio was invested in Japanese securities. Between the beginning of 1969 and the end of 1974, the fund roughly tripled in value, while the Standard & Poor's 500 stock index fell 3.4 percent.
The Soros Fund continued to realize spectacular returns in the second half of the 1970s. One perspicacious move was to get into technology- and defense-related issues long before the Reagan Administration military buildup. Between the end of 1969 and the end of 1980 the fund (which was renamed the Quantum Fund in 1979) gained 3,365 percent in value compared to 47 percent for the Standard & Poor's composite stock index. By the end of 1980--and after a year in which the fund doubled in value--the Quantum Fund was worth $381 million, and Soros's personal wealth was estimated at $100 million. Rogers left the firm that year. The cover story of the June 1981 issue of Institutional Investor called Soros "the world's greatest money manager."
Taking Aggressive Positions: 1981--92
Ironically, 1981 turned out to be Soros Fund Management's worst year, in which its fund, for the first and only time until 1996, lost money. Shares fell 22.9 percent, mainly because Soros, mistakenly thinking interest rates had peaked, took a heavy position in bonds. During what he later called an "identity crisis," in which he sought to extricate himself from day-to-day decision-making, investors withdrew one-third of the fund's assets.
Soros cut his staff to a few aides in September 1981 and turned over active management of most of the Quantum Fund to outside personnel. In 1983 he allotted management of half of the fund's money to Jim Marquez; the other half was in the hands of ten outside managers. Soros himself concentrated on macro analysis: world politics and its effects on monetary policies, plus changes in inflation, interest, and currency rates. By the end of 1983 the Quantum Fund had recovered its lost value.
Soros returned to active investing in 1984, and Marquez left the firm, his role eventually being filled by a team of four senior analysts/managers. In 1985 Soros leveraged the Quantum Fund's assets aggressively, taking positions worth more than its entire assets in support of his belief that the German mark and Japanese yen would rise against the U.S. dollar. The fund rose 122 percent in value that year, and its assets passed $1 billion. By now a dollar investment in the fund in 1969 was worth $164, after paying all fees and expenses. According to Financial World, Soros personally made $93.5 million in 1985. By the end of 1986 the Quantum Fund was worth $1.5 billion.
By contrast, the Wall Street stock market crash of October 1987 was a humbling experience for Soros, who was caught unprepared, He decided to sell large parts of the futures contracts of the Quantum Fund, but when the market recovered quickly, the fund lost $200 million in a single day and at least $350 million in all. The fund ended up 14 percent for the year, but Soros, increasingly absorbed in the political changes gripping Eastern Europe, again decided to withdraw from active management. Stanley Druckenmiller, hired in 1988, assumed the chief role the following year, with Soros as "coach." Half of all fees earned by Soros Management were allotted to the management team.
Between 1989 and 1993 the Quantum Fund, under Druckenmiller's direction, averaged annual gains of 40 percent in net asset value, higher than under Soros's own management. But Druckenmiller credited his boss. He told Jack D. Schwager, the author of New Market Wizards (cited in Soros on Soros), "Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig."
By this time the Quantum Fund had grown so large that in 1991 Soros established Quasar International Fund, to be run by 15 outside managers, though Soros was in charge of its currency trading. Quantum Emerging Growth Fund and Quota Fund were founded the next year. The former focused mainly on Asian and Latin American stocks, while the latter was a fund of funds, handled by ten outside managers. Quantum Realty Fund was established in 1993 and Quantum Industrial Holdings in 1994. Druckenmiller oversaw all these funds.
Soros Fund Management's readiness to "bet the farm" was put to the ultimate test in 1992, when Quantum Fund borrowed £5 billion and exchanged the currency for German marks, in support of the conviction that the British could not meet their commitment to maintain the value of the pound because it would require raising interest rates to a level that would throw their economy into deep recession. The British government spent £27 billion in a single day to support the pound but eventually gave up. The Quantum Fund made at least $1 billion from betting against the pound and perhaps another $1 billion in the Tokyo stock market and in trading the Italian lira and Swedish kroner. Quantum was the leading offshore fund that year, and four of the six best-performing funds were those of Soros Management. Soros himself, dubbed "the man who broke the Bank of England," earned at least $650 million that year, according to Financial World.
Those seeking Soros's investment philosophy were referred to his theory of "reflexivity" as set down in his 1987 book The Alchemy of Finance. He explained to Byron Wien in Soros on Soros, in less abstruse form: "The prevailing wisdom is that markets are always right. I take the opposite position. I assume that markets are always wrong.... I am ahead of the curve. I watch out for telltale signs that a trend may be exhausted." Soros the philosopher had also become Soros the philanthropist: initiator of a network of 20 foundations encompassing Central and Eastern Europe.
Competing Against Its Own Reputation: 1993--98
Quantum Fund reported a 61.5 percent gain in 1993, earning for Soros, according to Financial World, $1.1 billion, making him the first American to earn more than $1 billion a year. (FW later upped this to $1.33 billion from Quantum Fund alone.) Of the other 100 biggest earners on Wall Street that year, nine were associated with Soros Fund Management. The following year, however, Quantum Fund had a return of only about 3.5 percent. Druckenmiller mistakenly forecast that the yen would keep falling against the dollar and took a large short position on the yen, also purchasing a large amount of Japanese stocks and selling Japanese bonds. The result was a loss of somewhere between $350 million and $800 million on a single day. Even so, Quantum did better than most of its hedge fund rivals, some of which suffered double digit losses that year.
Quantum Fund enjoyed a 39 percent gain, after fees, in 1995. Soros Fund Management had mixed results in 1996. Quantum Fund, with $7 billion of the company's $17 billion in gross assets, ended the year down 1.5 percent. Druckenmiller said he had again been wrong again on the Japanese economy and had mistimed his buying and selling of U.S. stocks. Quota Fund, however, which had $3 billion in its coffers, reported an 82 percent gain, and the five other Soros funds also were profitable, with Quasar International registering a 47.5 percent gain.
When the currencies of Thailand, Malaysia, Indonesia, the Philippines, and South Korea came under assault from speculators in the summer of 1997, Malaysian Prime Minister Mahathir Mohamad accused Soros and other money managers of deliberately destabilizing Asian regimes. Soros replied that his company's funds had made only minor trades in Southeast Asian currencies over the last two months. Druckenmiller added that Quantum had sold the Thai and Malaysian currencies short, but in the early spring, before the crisis. Ironically, he--and other Soros fund managers--bought as much as $1.8 billion worth of the Indonesian rupiah. "The IMF program [to support the currency] was as comprehensive as any I've seen," he explained, "but [Indonesian President] Suharto just reneged on it. I was naive about the level of corruption there," he told Riva Atlas.
Quantum Fund posted a 17 percent return in 1997, but this was only half the rate earned by the S&P 500. Druckenmiller mistakenly sunk money into Japanese stocks while selling bonds shorts, counting on an economic recovery that never occurred. Among U.S. stocks, Quantum had a heavy stake in two big losers--Newmont Mining Corporation and Waste Management Inc. Quota Fund, by contrast, enjoyed a 44 percent gain, after the 82 percent rise in 1996 and an incredible 159 percent jump in 1995. Quantum Emerging Growth Fund was up 22 percent, but Quasar International Fund grew by just eight percent, leading to a decision to take the management in-house.
Soros Fund Management had begun actively investing in Eastern Europe and the former Soviet Union in 1994. By the fall of 1997 more than $2.5 billion of the company's funds was invested in Russian businesses. Russia's 1998 financial crisis, consequently, was a severe blow to the firm, which lost most of its investment as stocks plunged 80 percent. Nevertheless, Quantum Fund ended the year up 12.4 percent.
By late October 1998, Quota Fund was down 13.6 percent for the year, and Nicholas Roditi, the London-based chief adviser to both Quota and to Quasar International Fund, took a medical leave. Quasar Emerging Growth Fund had dropped in value by 31 percent for the year by this time and consequently was closed for "corporate restructuring," as Soros put it. He proposed merging Quasar International Fund into Quantum Industrial Holdings, which had become his principal private equity investment vehicle. One of the managers of the latter fund was Soros's son Robert.
Soros Fund Management was reorganized in 1997 as a limited liability company with a three-man management committee consisting of Soros, Druckenmiller, and Gary Gladstein, the company's chief administrative officer. There were six funds with about $21.5 billion in gross assets in the summer of 1998. At the beginning of 1998, Quantum Fund had $5.54 billion in net assets; Quantum Emerging Growth, $1.82 billion; Quota, nearly $1.7 billion; and Quasar International, $1.21 billion. Shares of these funds were being traded in London. Soros's personal fortune was estimated at $5 billion in 1997.
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