Soros to restructure as hedge funds fall from favour

One by one, the world's best known and largest hedge fund investors are calling it a day.

Citing extreme market volatility and problems of being a big, high-profile hedge fund, Mr George Soros and his trusted lieutenants, Mr Stan Druckenmiller and Mr Nick Roditi, have announced a radical restructuring of the once high-flying Soros Fund Management group.

Following a run of poor investment performance, Mr Druckenmiller and Mr Roditi are to retire from active fund management at the group. Quantum, which at $8.24 billion (£9.05 billion) is the Soros group's largest hedge fund, will be managed more conservatively to suit Mr Soros's needs for "a more reliable stream of income to fund my charitable activities". It is to be renamed the Quantum Endowment Fund, and Mr Druckenmiller's retirement will see Mr Duncan Hennes appointed head of risk management.

The group's $1.2 billion Quota Fund, formerly managed by Mr Roditi, will be managed by an unnamed "trusted outsider". Shareholders will be able to cash out, remain with the fund or move to the portion that will be managed by the unnamed adviser.

A smaller hedge fund in the group, Quantum Emerging Growth, will continue unchanged, and private equity and real estate businesses will be untouched.

In a letter to investors, Mr Soros wrote: "We have come to realise that a large hedge fund like Quantum Fund is no longer the best way to manage money. Markets have become extremely unstable and historical measures of value at risk no longer apply. Quantum Fund is far too big and its activities too closely watched by the market to be able to operate successfully in this market."

A month ago, Mr Julian Robertson made similar comments about market volatility when announcing the effective closure of his Tiger fund: "Price has been eliminated from the market. People believe they should buy the best company. It doesn't matter what it costs."

Mr Druckenmiller conceded: "When I saw what happened to him [Mr Robertson] . . . I was jealous that he was getting out of managing funds of that size."

For years Mr Robertson, Mr Soros, Mr Druckenmiller and Mr Roditi have walked tall in the hedge-fund industry. The combination of their sustained top-level investment performance, and the sheer size of the funds they managed, made them legends in the approximate $450 billion industry.

The nature of their macro and stock-picking investment styles led them to take large positions in currencies and stock markets around the world, often controversially. Mr Soros, for example, is well remembered in Britain as the man who "broke the pound" in 1992.

Mr Robertson also specialised in large one-off investment bets, and these brought huge profits. They also brought fame and led other investors to watch and attempt to follow the fund managers' every move. "We became closely watched," Mr Druckenmiller said yesterday. "Everybody can draw up the portfolio and look at it; this has also made it more difficult."

In the past, Mr Soros and Mr Robertson were able to exploit rates or commodity prices. But in a world of low inflation, opportunities for such global macro investing have dwindled.

Furthermore, the value stocks that the fund managers sought have fallen from favour in markets dominated by technology shares and momentum investors.

Over the past 18 months, investment performance at Tiger and Soros began to wane. Quantum, for example, only bounced back from a negative performance last year because of Mr Druckenmiller's late entry into technology stocks. This helped Quantum achieve a return of 34 per cent last year, but so far this year the fund is down 21 per cent, and Quota is down 32 per cent.

The final straw appears to have come four weeks ago, when the US Nasdaq index posted a record one-day points loss in a week of extreme volatility.

"I don't want to do it, continue managing the fund . I don't need to prove anything to myself or anyone else," Mr Druckenmiller said. The group began selling and says it is now in a position to return cash to all of its investors in return for their shareholdings in the fund.

While doubting the ability of large hedge funds to achieve above average performance, Mr Soros remains bullish about the prospects for the industry. "There are an awful lot of smaller hedge funds and I think they will continue to be a very viable way of managing money."

Mr Hunt Taylor, a hedge fund consultant, agreed. "The industry is quite healthy and growing. It's just some of the marquee players that are suffering."