Friday morning (4/28/2000) billionaire speculator
George Soros and his departing first lieutenant
Stan Druckenmiller spoke with a small group of journalists at the midtown Manhattan headquarters of
Soros Capital Management. TSC
was represented by Chief Markets Writer Brett D. Fromson. Soros and Druckenmiller were joined by
Duncan Hennes, who is not a portfolio manager but is in charge of managing the risks embodied in Soros' giant
Quantum Fund. The interview took place in the Soros boardroom, overlooking Central Park.
What follows is a partial transcript of the questions and answers.
Stan Druckenmiller: When I saw what happened to
Julian Robertson and I was jealous that he was leaving the business and he's not even down yet, I knew I was in trouble because this guy suffered to that extent and yet I was still jealous because he was getting out of managing funds of that size. The thought process started 18 months ago ... when we had a fantastic month. I don't know what we made off the bottom, but -- I don't know, maybe 60%-70%, I'm not sure. And then I'd say sometime during the
Nasdaq pummeling and the NAV [Net Asset Value], that's when the decision was made.
Q: So you started after the Nasdaq started to collapse?
SD: Oh yes. Yes, the timing of it couldn't have been better. It's the nature of the business.
Q: And was its tech the main reason why you're down?
SD: Not entirely, I lost money early in the year in macro. Nowhere near 22% and those loses were masked by gains in technology. The big swing in the NAV in the last month has certainly been tech, yes. And to some extent, the last two to three weeks [of selling was] the cost of preparing cash for potential needs.
Q: Do you regret going into tech?
SD: No. Again, I don't know what we made and what we gave back but, let me see, if we were down 20% and up 30%, 'cause of the way the math works it's more than 50%, so we probably made 60% and gave back half that.
George Soros: We were down 20% [early last year] and then we recovered, and at the end of the year up 33% .... So it is a 60% rise in the second half of the year. And we then had a 22% drop from the end of the year [to today].
Q: What are your plans now? Where do you go from here?
SD: The first thing I'm going to do is go with my family to Africa in June, unencumbered by the fact that I'll be responsible for a fund. Then I plan on spending the summer with my family and I'll decide between then and say Labor Day what I'm going do. I want to have a completely open mind, see whether I get bored, see whether I find another interest. I don't know. I just feel I need a break.
Q: Do you have money in the fund? Personally? How much do you have?
SD: Now that I'm no longer in the limelight I don't need to tell you that.
Q: Was it one of your staple funds?
SD: Substantial funds will stay in the fund.
Q: But while you're on your sabbatical the [investing] team will be thinking.
SD: The team will be on sabbatical. I'm basically going to tell investors that I'm going to be on sabbatical and [the investors will] be offered a chance to leave because I don't know when or if I'm coming back.
Q: And what happens to the money in the meantime?
SD: Well, I'll put it in the position so that hopefully it won't move.
Q: Mr. Soros, you make some points in your letter about the size of the hedge funds and [that] some hedge funds are "too large" to fulfill their return potential. Can you talk about that?
GS: We have been discussing that for years. In fact, when the fund originally reached the size of $2 billion [around] '87, I decided to distribute the earnings and not keep them in the fund. [Because of the market's increased volatility] this is not the best way now for me to invest my money, and therefore based on our understanding it's not the best [way] for our shareholders to have their money managed.
Q: Is that because the markets have changed or because your needs have changed?
GS: I think that the market has changed. I think when you look at the volatility of the market, it shows that [historical] value-at-risk calculations no longer apply.
Q: And why do you think that is?
SD: I'd like to answer that question also. I don't think that it's just the market. I've been talking about size with George since '92-93 and in the beginning no one believed me, and then unfortunately later on I proved it. But there's no question that even if the volatility in the market hadn't changed, the size of money we're running and trying to achieve 30% net returns [for the] investors we have ... I just think that's too much money to achieve that with and have the risk profile we used to have, which is trying to avoid big broad ends.
Q: So specifically, why does it make the returns seem so difficult?
SD: Well, let me give you an example. Let's focus on the stocks around the Nasdaq and let's suppose you had $12 billion under management as opposed to $100 million and suppose the Nasdaq went down 33% in 14 trading days. You think you can get out with the $100 million or the $12 billion easier? And the other problem is we became famous.
GS: We are very closely watched. Every rumor, every move is immediately public interest. To some extent, we were protected by the fact that there were many more rumors than we had moves. Some of the rumors were right but many of them were false, so we got away with that up to a point. But I think also with the information that was available -- that everybody could go up, get our portfolio and look at it -- this has also made it difficult. There are two major elements: One is the volatility, the other is the visibility.
Q: But, with all due respect to you, the front running that you encountered [was] in the currency market, where you were considered gurus and messiahs. That is not so true in the technology world where you had new gurus come up, and so was it just getting out of those positions?
SD: The technology was just a mistake, I overstayed my welcome. Again, you asked me if I was happy we did it. I am because with that we made $5 billion in technology and lost $2 billion, not a bad year's work. But, no, we're not saying technology is front running -- I was giving an example of a size. No, I don't think we were front running in technology, I think we were wrong. I don't think the market went down because Soros was in technology.
Q: What was wrong about it? What do you think you did wrong?
SD: I overplayed my hand.
Q: In what way?
SD: I should of [sold] in February when exuberance was what it was. I didn't. We sold some, but we thought it was the eighth inning when it was the ninth.
Q: A lot of people say you were late in technology to begin with, very late, like late last year. What would you say to that?
SD: They can say what they want, just look at the net asset value of the fund.
Q: What is the optimum size of the fund, because $8 billion still strikes me as one of the largest hedge funds around. What is the size you want the fund to get to so that you lose the disability, the size factor?
GS: I would say the way we are going to operate the fund we can easily operate at $5 billion-$6 billion. It might be operable at $8 billion because we're going to change our method of operations.
SD: Just to be clear on that, it's difficult to run a large hedge fund and keep the kind of terms we have in store and still run it like a one-half billion-dollar hedge fund. Just have to expect more.
Q: In what magnitude? What kind of returns do you expect now and what kind of instruments will you be investing in?
GS: We'll have to use a variety of [strategies] and some macro. And the smaller portion, long and short stocks.
Q: What do you expect the performance will look like then, if you're not doing 30% a year?
GS: I think if we can average 15% a year, I would be very, very happy.
Q: Who will run the fund?
GS: Duncan [Hennes] is going to manage the risk portion.
Q: So how will the responsibilities be managed?
GS: There will be branches and smaller entities operating under a general risk management.
SD: I think another way to talk about it is to say that we're going to run it like an internal fund of funds. So we'll be allocating capital to various different strategists and George has described this as risk management with the various different exposure limits, stop losses.
Q: And how many teams do you expect to have?
Duncan Hennes: Internal, maybe eight to a dozen.
Q: Do you expect to trim back your staff?
SD: There will be some, but we expect a very large percentage will stay. Many have just been hired in the past year.
Q: The hedge fund industry. What are you thoughts about the hedge fund industry?
GS: I think there are an awful lot of smaller hedge funds and I think that they continue to be a very viable way of managing money, and actually I will manage part of my money effectively by having smaller hedge funds. Plus it will be a risky business because of this volatility, so hedge funds have to be very careful about managing risk. So there will be casualties among them. But as a way of counting money, I think it's a real way of compensating the manager based on performance, which is what the hedge fund is all about.
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