Soros to End Four-Decade Hedge-Fund Career

Date: Wednesday, July 27, 2011
Author: Katherine Burton, Bloomberg

George Soros, the billionaire best known for breaking the Bank of England, is returning money to outside investors in his $25.5 billion firm, ending a career as hedge-fund manager that spanned more than four decades.

Soros, who turns 81 next month, will hand back the money, less than $1 billion, by the end of the year, according to two people briefed on the matter. His firm will focus on managing assets solely for Soros and his family, according to a letter to investors. Keith Anderson, 51, chief investment officer since February 2008, is leaving, said the letter, signed by Soros’s sons Jonathan and Robert, who are co-deputy chairmen.

“We wish to express our gratitude to those who chose to invest their capital with Soros Fund Management LLC over the last nearly 40 years,” they said in the letter. “We trust that you have felt well rewarded for your decision over time.”

The move completes Soros’s transformation from a speculator, who in 1992 made $1 billion betting that the Bank of England would be forced to devalue the pound, to philanthropist statesman, a role he first imagined for himself as a Hungarian émigré studying at the London School of Economics after World War II, according to Soros’s writings. In the last 30 years, he’s given away more than $8 billion to promote democracy, foster free speech, improve education and fight poverty around the world, he said in a recent essay.

Family Assets

Soros’s sons said they took the decision because new financial regulations would have made it necessary for the firm to register with the Securities and Exchange Commission by March 2012 if it continued to manage money for outsiders. Because the firm has overseen mostly family assets since 2000, when outside money accounted for about $4 billion, they decided it made more sense to run it as a family office, according to the letter.

The rule calls for hedge funds with more than $150 million in assets to report information about their investors and employees, the assets they manage, potential conflicts of interest and their activities outside of fund advising. Registered funds will also be subject to periodic inspections by the SEC.

“We have relied until now on other exemptions from registration which allowed outside shareholders whose interests aligned with those of the family investors to remain invested in Quantum,” the executives said in the letter, referring to its flagship Quantum Endowment Fund. “As those other exemptions are no longer available under the new regulations, Soros Fund Management will now complete the transition to a family office that it began eleven years ago.”

Druckenmiller’s Move

Soros, who controls more than $24.5 billion for himself, his family and his foundations, declined to comment on the letter. Last year, Stanley Druckenmiller, Soros’s chief strategist from late 1988 until 2000, closed his money- management firm, Duquesne Capital Management LLC, and created his own family office.

While Quantum has returned about 20 percent a year, on average, since 1969, when its predecessor was started, according to a person familiar with the firm, the fund’s performance has suffered in the last 18 months. In the first half of this year, Quantum lost about 6 percent, the person said, following a gain of 2.5 percent in 2010. Other macro funds have returned 5.6 percent in the last year-and-a-half, according to Chicago-based Hedge Fund Research Inc.

Soros was born in Budapest in 1930, as Dzjchdzhe Shorash, according Robert Slater's book ``Soros: The World's Most Influential Investor.'' When the Nazis invaded the city in 1944, Soros’s father arranged for false papers for his family and friends that identified them as non-Jews. Most of the people his father helped survived the war, Soros said in the essay published in the New York Review of Books in late June.

‘Evil Force’

“Instead of submitting to our fate we resisted an evil force that was much stronger than we were -- yet we prevailed. Not only did we survive, but we managed to help others,” he wrote, adding the experience gave him an appetite for taking risk. “This left a lasting mark on me, turning a disaster of unthinkable proportions into an exhilarating adventure.”

After London, Soros came to New York at the age of 26 and became a trader, initially buying and selling stocks for Wall Street brokerage F.M. Mayer. He planned to work for five years, enough time, he reckoned, to save $500,000 and return to England where he would pursue his philosophical studies, according to an interview he gave to Michael Kaufman, author of “Soros: The Life and Times of a Messianic Billionaire.”

Instead, he stayed in the world of finance, eventually moved to Arnhold and S. Bleichroeder Advisors LLC, where he set up the predecessor to the Quantum fund in 1969. He started his own firm in 1973.

Conflicting Goals

Over the years, Soros had to deal with conflicting goals of making good and doing good. While Soros’s fund made about $750 million betting on a decline in the Thai baht in 1997, the wager increased economic woes in Thailand as the government spent billions unsuccessfully defending its currency. In the wake of the devaluation, Thailand was forced to cut public spending in exchange for a $17.2 billion rescue package from the International Monetary Fund.

In 1997, his philanthropic tendencies drove him to buy Russian assets. He took a $1 billion stake in RAO Svyazinvest, Russia’s state-owned telecommunications company, and went on to buy Russian stocks and bonds. He didn’t sell his positions even after publishing a piece in the Financial Times advising the government to devalue the ruble by 15 percent to 25 percent. Four days later, Russia followed his advice.

“He felt that if he was a beacon of investment in Russia, others would follow and the capital inflows would transform the society and integrate them into the G7,” Robert Johnson, a former Soros managing director, told author Sebastian Mallaby in his book ‘More Money than God.’ “There’s a philanthropic side of George that started to interfere with the speculative one.”

‘Public Interest’

In his recent essay, Soros echoed the remarks of his former colleague.

“I have made it a principle to pursue my self-interest in my business, subject to legal and ethical limitations, and to be guided by the public interest as a public intellectual and philanthropist,” he wrote. “If the two are in conflict, the public interest ought to prevail,” he said.

Soros opened his first foundation, the Open Society Fund, in 1979, when his fund had reached about $100 million and his personal wealth had climbed to about $25 million. His initial focus was on promoting democracy and a market economy in Eastern Europe. Soros now funds a network of foundations that operate in 70 countries around the globe, everywhere from the U.S. to Montenegro to South Africa and Haiti.

In late 1988, he hired Druckenmiller to be his chief strategist to take over the day-to-day trading of the firm’s assets so he could concentrate on his charitable pursuits.

Breaking the BoE

While Druckenmiller was the architect of the $10 billion British pound trade, which forced the currency out of the European exchange-rate mechanism, Soros served as a coach to the younger man, encouraging him to increase his bet.

Druckenmiller left in 2000, together with another star manager, Nick Roditi, after losses when the technology bubble burst. Just two years before, the firm had been the biggest hedge fund in the world with $22 billion in assets, and Soros said it was too much money to manage in such concentrated positions.

After the departures, Soros decided to farm out more money to portfolio managers both inside and outside Soros Fund Management. He said he would settle for a 15 percent annualized return, about half of what the fund had posted since its start.

Stepping In

In 2007, as the subprime mortgage crisis was gaining speed, Soros again stepped in. Quantum returned 32 percent that year and posted an 8 percent gain in 2008, when funds on average dropped about 19 percent. Overall, Quantum Endowment grew from about $11 billion in June 2000 to today’s level.

The firm went through several chief investment officers, including Soros’s son Robert, before hiring Anderson, who was a co-founder at BlackRock Inc. and its global fixed-income chief.

The uncertainty about markets and Quantum’s 6 percent dive caused Anderson to sell positions in mid-June and the firm is now holding about 75 percent cash. It hasn’t been decided whether Jonathan and Robert will hire a new CIO, or whether they will add to their stable of external managers.

In the meantime, Soros continues to focus on his philanthropy and on voicing his views on macroeconomic events, such as the sovereign debt crisis in Europe.

“My success in the financial markets has given me a greater degree of independence than most other people,” Soros wrote in his recent essay. “This obliges me to take stands on controversial issues when others cannot, and taking such positions has itself been a source of satisfaction. In short, my philanthropy has made me happy.”

To contact the reporter on this story: Katherine Burton in New York at kburton@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net