George Soros famously instructed his deputy Stanley Druckenmiller to “go for the jugular” in betting Downing Street and Bank of England would fail in shielding sterling within Europe's exchange rate mechanism, with his Quantum Fund punting hard against it.
George Soros famously instructed his deputy Stanley Druckenmiller to “go for the jugular” in betting Downing Street and Bank of England would fail in shielding sterling within Europe’s exchange rate mechanism, with his Quantum Fund punting hard against it.
Soros, and investors with Soros Fund Management, geared up, and won.
The humbled Chancellor of the Exchequer, Norman Lamont, and his prime minister John Major lost.
And ignominiously, the UK was forced from the ERM.
Soros reportedly made more than $1bn for his investors from the punt, while professional peers Bruce Kovner (Citadel), Paul Tudor Jones (Tudor Investment Corp) and FX desks at seven US banks each reportedly bagged over $100m each.
In ‘breaking the Bank of England’ the speculator from Budapest showed nation states who was boss in capital markets.
In this light, it is telling that his two sons – and co-deupty chairmen of his $25.5bn fund management business – cited increased oversight of their $2trn industry as a primary reason to return all their external investors’ cash this year.
SFM will continue, but as a family office for the Soros clan and its various philanthropic activities.
It has taken more than 40 years since Soros opened his first, $4m hedge fund in 1969, about two decades since he humbled Downing Street, and two years since the financial crisis ended, but at last governments and notably Washington have turned the tables on Soros and his ilk.
It is politicians who are now calling the shots.
America’s Dodd Frank financial reform act – a direct result of the financial crisis, which many onlookers still feel hedge funds played a pivotal role in causing – will force hedge fund advisors with significant external money to register with the Securities and Exchange Commission.
Additionally they will have to provide swathes of information to watchdogs.
Various other bodies of law, and restrictions around short selling in some countries, are also emasculating hedge funds in other ways.
It is even a far cry even from the mid-1990s, when the US President’s Working Group on Financial Markets – which earlier said the industry “deserves extra scrutiny” – went all weak at the knees when Soros appeared.
He testified that leverage, such as his Quantum fund had used to hobble the BoE, was indeed a problem for markets. But it should be restricted for brokerages and banks, not just hedge funds.
Powerless no more, President Obama and notably his peers in Europe now show no signs of going easy on hedge funds. Just ask Poul Nyrup Rasmussen, European Socialist Party president in Brussels.
External investors will mourn the loss of access to Soros’s skills.
Quantum made 31.5% in 1989, followed by 29.6%, 53.4%, 68.8% and 63.2% in the following four years – average annual returns of 49.3%.
Over the past five years, the average full-year return from global macro hedge funds was a comparatively modest 7.2%.
Perhaps reflecting this, is it years since the largest hedge funds took such concentrated bets as Soros and his largest industry peers commonly did in the 1980s and 1990s.
Many allocators fear managers cutting risk, not taking it, is too much in vogue now.
Not everyone will miss Soros’s significant presence, though. Politicians, for example – and maybe some former employees.
When Druckenmiller threatened to quit Soros Fund Management and return to his own Duquesne firm in 1989, Soros persuaded him not to, by moving to London himself.
Soros reportedly fired Druckenmiller the parting shot: “Now we’ll find out whether I’ve just been in your hair too much, or whether you really are inept.”
Another former colleague, Jim Rogers famously fell out with Soros, and speaks rarely if his erstwhile colleague now.