Regulation alone doesn't explain Soros exit

Date: Wednesday, July 27, 2011
Author: Christopher Swann, Reuters

Hedge fund legend George Soros has suggested regulatory red tape is leading him to bow out of investing other people's money. He's not alone. Stanley Druckenmiller and Carl Icahn made similar noises when handing back investors' money. But with only trivial sums of outside cash, none of these billionaires needed much encouragement to do so. Rules are a handy scapegoat, but on their own they're not chasing away industry lions.

True, the hedge fund industry didn't entirely escape the regulatory blitz that followed the financial crisis. As part of the Dodd-Frank financial reform act, funds that invest outside money will have to register with the Securities and Exchange Commission by the end of the first quarter of 2012, providing details of their investors, employees, assets and potential conflicts of interest.

It's hard to see how such modest requirements would motivate all but the most seasoned -- and rich -- of investors to exit managing outside funds, which can supercharge their own returns through fees. Customers are an equally high-maintenance group, demanding regular letters and phone calls. And when times get tough they can often flee. So when hedgies reach a certain level of wealth it's tempting to go it alone. Given that less than $1 billion of Soros' $25.5 billion of assets come from outside investors, it's surprising he didn't make this move sooner.

In addition, large chunks of client money can do more harm than good when investment opportunities are scarce. Druckenmiller, who gave outside investors in Duquesne Capital their money back last year, implied that managing more than $10 billion limited returns. Skittish markets have made life tough recently for macro funds, denting performance. Soros's famed Quantum Fund is down about 6 percent in the first half.

After a strong and persuasive campaign, the hedge fund industry managed to avoid onerous regulation. This was only right given the industry did not require taxpayer handouts during the financial crisis and many funds failed without dragging markets down with them.

Of course, once regulators get their tentacles around hedge funds it's possible they will continue to squeeze tighter. But this is an abstract risk further down the road -- one that only a few hedge fund managers who don't need the money can afford to act on today.

CONTEXT NEWS

-- Billionaire investor George Soros, whose stock-picking career has spanned nearly four decades, said he will manage money only for himself as new regulations threaten to crimp the hedge fund industry he helped invent.

-- The octogenarian fund manager, known as much for earning $1 billion on a nervy currency bet against the British pound as for giving away millions to support liberal causes, told investors that he will return roughly $1 billion to outside investors and turn Soros Fund Management into a family office.

-- Keith Anderson, who has been Soros' chief investment officer since 2008, will leave the firm.

-- In a letter to investors, Soros' two sons cited impending industry regulation as a reason for returning the money the fund still oversaw for outsiders, which is a relatively small percentage of the roughly $25 billion Soros oversees.