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.
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
, 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
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
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.
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.
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
, 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.
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
. 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.