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Soros:AnatomyOfAComebackBloomberg

Soros:AnatomyOfAComeback
GaryWeiss

gary_weiss
September25,199512:00AMEDT

GeorgeSoroshasfaceddownmanyadversariesinhis65years:NazisinhisnativeHungary,
Communistdictatorssuspiciousofhisphilanthropyandadvocacyofopensocieties,and,more
recently,thecentralbanksofEurope.Sorosgainedfameacoupleofyearsagoas"themanwho
movesmarkets,"byaggressive,highlyleveragedtradingincurrenciesandbonds.Asatraderand
investor,hislongtermrecordisunsurpassedanaverageannualreturnof35%since1969,among
thebestintheworld.Butinrecentmonths,itseemed,Soroswasfacingathreatasdauntingasany
posedinthepast.Hisflagship$6.1billionQuantumfundwasstruggling.Hisreputationwasin
jeopardy.
ThetensionatSoros'headquarters,acrossthestreetfromNewYork'sCarnegieHall,wasalmost
palpable.Inthefirstthreeweeksof1995,Quantumwasdown6%,anditfoughttobreakeven
unsuccessfullythroughmostofthefirsthalf.Inthepast,suchdeclineswerejusttemporary
setbacksaftergoodyears,suchasQuantumenjoyedfrom1990through1993.Soroswastroubled.
"Iwasconcerned,"henotedtheotherday,"thatitwasnotasoftlandingthatwewereactually
sinking."
Itwasasifthemarketswereconspiringtodestroyhim.SorosandhischieflieutenantStanley
Druckenmillerbetonthedollaras1995begananditfell.TheybetontheJapanesemarketandit
fell.TheirexposuretotheU.S.stockmarketprovedinadequate,andthatwaswheretheactionwas.
Drivenbyfinancialstocksandaboomintechnology,theS&Pwasup20%attheendofthefirst
half.Quantumwasdown6.5%.JulybeganhotandstickyintheEastEndofLongIsland,where
Sorosspentmostofthesummer.Butthencametheshowerofgreen.
PROSAICPICKS.DuringthefirsttwoweeksofJulyalone,theSorosDruckenmillerteammoved
theirhumongousportfolioskyward9%ahalfbilliondollargainworthyoftheSorosofyore.
Then,inAugust,Quantumbeganasteadyclimb,gaining17%inthatmonthalone(chart).During
thesameperiod,theS&Psputteredandprofittakingdoggedthehightechstocks.September
beganasspectacularlyasintheglorydays,witha$100millionstockgainonSept.5.OnSept.13,
Quantumreapedaheady$200millionwindfall,largelythroughaleveragedbetonthedollar.
ThroughSept.13,Quantumisup24%afterexpensesandfees,vs.26%fortheS&P.
HowdidSorosandDruckenmillerpullitoff?Soroshasbeenmumuntilnow.Inseparate
interviewswithBUSINESSWEEK,atannedandcheerfulSoros,andhisdourchieflieutenant
Druckenmiller,disclosedforthefirsttimehowtheymanagedtoachievethisstunningreversal.Yes,
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currencytradingplayedaroleinQuantum'srevivalbutafarmorelimitedrolethanhasbeen
rumored.Stockselection,heandDruckenmillerinsist,wasamajorfactorinQuantum'srecovery.
Sorosevendisclosedthefund'slargeststockholdingsanearlyunprecedentedstepforQuantum,
exceptforitsrarelypublicizedannualreports.Butevenwhiledeemphasizingtheroleofmacro
trading,hemadeitclearthathewillincreasehisuseofleverageasQuantum'sfortunesimprove.
Clearly,healreadyhasastheSept.13surgeindicates.Druckenmilleracknowledgesthatheis
usingmoreleveragethanhedidasrecentlyasJune.
Soros'decisiontogopublicisincontrastwithotherhedgefundmanagers,whohavebeenlargely
silent.Thebigfundsfellupto30%in1994Quantumekedouta3%gainandnonehave
reboundedin'95quitesodramaticallyasSoros'.SuchsuperinvestorsasMichaelSteinhardt,Leon
G.Cooperman,andJulianRobertsonJr.arecomingback,however,andtheyleadaresurgence
amongthepreviouslaggardhedgefunds(table,page102).
CHALLENGESREMAIN.Butforthehedgefundbusinessingeneral,includingQuantum,long
termproblemsremain.Unlesstheirmediocreperformancereversesasdecisivelyasithasfor
Soros,investorscouldbecomereluctanttopayheftyincentivefeestohedgefundmanagerswhich
usuallyamountto20%ofprofits.(Mutualfunds,bycontrast,reinvesttheirprofits.)Sizeisa
problemforthelargestfunds.Fedbythegainsmanyachievedearlyinthe1990s,sizeworks
againstSorosandtheothermegafunds.Soroshaslongacknowledgedthis,andithasbeena
particularproblemforSteinhardt,whoiswidelyrumoredforthesecondtimeinayeartobe
planningtoshutdownanddistributefundassetstohisinvestors.Hewon'tcomment,butthe
rumorsarediscountedbySteinhardtcolleagueswhosaythatthemercurialfundmanagerhasample
reasontostayinbusiness.(Quantum,thoughusuallygroupedwithhedgefundspartnershipsfor
thewealthyisactuallyanoffshoremutualfund,closedtoU.S.citizens.)
Forthemoment,however,theeverharsherrealitiesofthehedgefundbusinessseemfarawayfor
Soros.Hissuccessfulconfrontationwiththemarketsisfarmoremultifacetedthanmerelya
leveragedbetonthedollar.Italsohasinvolvedjettisoningprojectsthatseemproblematic,suchas
afundinvestinginIndiaandarealestateventurewithPaulReichmann.AccordingtoSoros,the
dealwithReichmannfellapartbecauseSorosrefusedtoprovidefinancialbackingforReichmann's
efforttoregainhisCanaryWharfprojectadealrejectedbySoros,hesays,becauseofitshuge
size.
WINNINGCOACH.InhisinterviewwithBUSINESSWEEK,thenormallydourand
philosophicalSoroswascheerful,evenelated.Hisnew,sometimeschatty,sometimesopaquebook
SorosonSorosissellingwell.Buttherewasatangiblereasonforhischeeriness.Hehadjust
reapedhisoneday$100milliongain,notfromthekindofhighoctane"macro"investingthat
madeSorosfamous,butthroughthatmostprosaicofWallStreetpastimesstockpicking.It
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epitomizesthechastened,morecautiousGeorgeSorosof1995.That$100milliongainsprang
fromSoros'portfolioofstockholdings,ledbyBurlingtonNorthern,Chrysler,NewmontMining,
Intel,andScottPaper.
InmidJuly,asSorosonSorosbegantocascadeofftheprintingpresses,Sorostoldhisfunds'
investorsthathewasretreatingfromthebigpicture,highlyleveragedmacroinvestingin
currenciesandbondsthathadbeenhisforte.Yetinthefewweekssincethebookbeganarrivingat
thestores,Soroshasseenhismacrostrategiespayoffdramatically,andhas"coached"hisflagship
Quantumfund,byfarthebiggestandmostsuccessfulhedgefundintheworld,todramaticgains.
AlthoughSorosspentJunetendingtohisphilanthropicoperationsinEasternEurope,particularly
Ukraine,andthenJulyandAugustinSouthampton,hekeptindailycontactwithDruckenmiller
andwithotherkeysubordinatesincludingNicholasRoditi,theLondonbasedtraderwhoruns
macrotradingforSoros'Quotafund.
Roditi,whodeclinedtobeinterviewed,hasemergedasastaroftheSorosorganization.Hesteered
the$1.5billionQuotafundtothekindofperformancethatdistinguishedQuantumintheolddays
againof105%intheyeartodate.HewasindailycontactwithDruckenmilleraswellasSoros
throughouttheyear,buttheydidnotseeeyetoeyeverymuch.AccordingtoDruckenmiller,at
timesRodititookmacropositionsthatweretheexactoppositeofthemoneylosingpositionsheld
byQuantum."Hewasontherightsideofthemarketsfromdayonethisyear,"notes
Druckenmiller.
Quotawasabletobuildonitsgains,toriskoldprofitstomakenewprofits.ButQuantumdidn't
havethatoption.EventhoughSorosfeltthathisbullishnesstowardthedollarwasbasicallyright,
hewasrestrainedfromusingleveragebyhisownlosses.FormacroinvestorslikeQuantum,losing
moneyislikeaprogressivedisease.Themoremoneyyoulose,theharderitistotaketheleveraged
risksthatarerequiredtohelpyourecoverbecausethoseveryriskscandestroyyou.
LOSTMOMENTUM.Butifyou'remakingmoney,youarenotriskingthefirm'sveryexistence,
onlyitsrecentprofits.Itisasimplebutdeadseriousdilemma."Whenyou'relosingmoney,it's
hardertomakemoney,"saysSoros."Itwasverydifficulttoregainmomentum."Everytimeatrade
provedsuccessfulinthefirsthalf,itwasnotsuccessfulenoughtheleveragewasminimalandthe
currencymarketsturnedsouragain.Momentumwaslost."IfIweretolookatachartofourasset
valueI'dsaythatwetouchedthebreakevenpointatleastfivetimes,andthenwefellback....But
onceweputourheadabovezero,wecouldmoveahead."
ForQuantum,thepsychologicalturningpointcameinearlyJuly.Whatgotthefundreallymoving
wasthegainintheJapanesemarket,earlyinJuly,thatcoincidedwiththeconcertedinterventionin
thedollaryenmarket.FortunatelyforthewoundedQuantum,Druckenmillercalledthebottomof
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theJapanesemarketrightonthenose.
"Thatmighthavebeenthepsychologicalbottom,"saysDruckenmiller."Ithinkitwasaconfidence
booster,yes.Thatwascertainlyoneofthethingsthatmadeusfeelweweren'ttotallyincompetent
aroundhere....Wehadbeenshort[theJapanesemarket]andwesuccessfullyavoidedgettingkilled
whenitwentbackup.Itgaveusasenseofconfidencetodootherthings"suchastakealong
positioninthedollarvs.theyen,andinEuropeanandJapanesebonds.Failingtocallthebottom,
henotes,"mighthavepreventedusfrombeingaggressiveinsomeoftheareaswewererightin."
Druckenmillerispeevedatrumorsthathavedoggedthefund,dismissingitsgainsasasimple
mindedleveragedbetonthedollar."Completebaloney,"saysDruckenmiller."Ourworldwide
fixedincomegainsthisyeararelargerthanourcurrencygains."
SorosandDruckenmillerinsistthatstockpickinghasbeenassignificantforQuantumlatelyas
macroinvestinganassertioncertainlybuttressedbythe$100millionSept.5gain.Sorosfavors
companies"wherethere'sachangeinthewaythecompaniesaremanaged."HecitedScottPaperas
anexampleofacompanywhere"managementhasmadeatremendousdifference.Wearevery
interestedinthequalityofmanagement."
FIRSTLOVE.Butmacroinvestingisclearlyhisfirstlove.TheSept.13gainshowsthatQuantum
isagaintakingleveragedmacrobets,despiteSoros'decisiononJuly14tocutbackonmacro
investing.Macroinvestingwaseliminatedentirelyexceptas"marketconditionspermit"for
Soros'QuasarandQuantumEmergingfunds.Butwithmacroinvestingcomingback,Sorosnow
apparentlyfeelsthattheconditionsarerightforQuasarandQuantumEmergingtoresumemacro
trading.Nowhesaysthat"someotheryoungerpeopledosomemacrotrading"inthosefunds.
ForSoros,macroinvestingisanintellectualchallengeandonethathemakessounddownright
easy.HelikenstherecentsituationtotheperioddiscussedinhisbooktheAlchemyofFinancethe
timeofthePlazaaccordsof1985,whichallowedgovernmentstointerveneinthefreelyfloating
exchangeratesystem.
Atthattime,Soroshadafirmlyheldviewon
currencies,andittookanudgefromthecentralbanks

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tohelphimmakemoney.Likewise,Quantum'srecent

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authoritieswouldsenditthere.Whatthebankersdid
was"tomakeitmoveinthedirectionwhereitought
tohavegonebyitsmwn.HowshallIsaythe
situationdemandedit."

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Clearly,macroinvestingwillbeoneareawhere
GeorgeSoroswillcontinuetolead."We'refinallygettingitright,"saysSoros.Andhow.Butthe
earlymonthsofthisyearprovethateventhesmartestpractitionersofmacroinvestingcancome
veryclosetobeingknockedoutforgood.Sorospulleditoffthistime.Butifthemarketssendhim
reelingonceagain,hemaynotbesolucky.

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