NEW YORK (CNNfn) - Soros Fund Management is overhauling its flagship Quantum Fund, amid steep losses in technology stocks and the departure of two top managers, in yet another example of Wall Street veterans getting stung by market volatility.|
The world's largest hedge fund on Friday said Stanley Druckenmiller, 46, manager of the Quantum Fund for 12 years, and Nick Roditi, 54, manager of the Quota Fund, will step down as the funds have plunged as much as 33 percent this year. Quantum's assets have dropped by about $4 billion.
In a letter to shareholders, founder George Soros said he is reorganizing Quantum Fund to make less risky investments because of market instability. The fund is too big and too closely watched on Wall Street to be effective, he said.
"We have come to realize that a large hedge fund like Quantum Fund is no longer the best way to manage money," Soros wrote. "Markets have become extremely unstable and historical measures of value at risk no longer apply."
The hedge fund industry is still reeling from news last month that another Wall Street heavyweight, Julian Robertson, is closing all six of his funds at Tiger Management.
Robertson, once regarded as one of Wall Street's highest rollers, was a value investor who had suffered sharp losses for more than a year.
"The last couple of months, with Julian Robertson closing its doors and Soros making these changes, it's somewhat of a shock," said Meredith Jones, director of research at Van Hedge Fund Advisors, a hedge fund tracker in Nashville, Tenn. "These are pillars in the industry with exceptional track records."
For the Soros funds, the losses started piling up this year. Quantum Fund, which had been as large as $10 billion in assets in 1998, was at $6 billion at the end of March, according to Barry Colvin, director of research at Tremont Advisors, another fund researcher in Rye, N.Y.
Quantum Fund and Quota Fund were trounced by losses in technology stocks in the last few months as the Nasdaq has been rocked with volatility. Quantum is down 22 percent and Quota is down 33 percent this year, according to HedgeFund.net.
From Russia to Silicon Valley
Quantum Fund made the switch into technology following big losses during the Russian ruble crisis of 1998, said Johann Wong, president and founder of the online publication HedgeWorld.com.
Economic turmoil in Asia and Russia back then had hobbled some of Soros's high-profile hedge funds. In October 1998, Soros was forced to close the $1.5 billion Quantum Emerging Growth Fund after it lost nearly a third of its value amid a plunge in value of the ruble. Soros merged Quasar International Fund into another fund for the same reason.
Wong said Soros built up big positions in U.S. technology names following the Russian crisis in stocks like wireless company Qualcomm (QCOM: Research, Estimates) and Internet software company Checkpoint Software (CHKP: Research, Estimates).
"(The Russian crisis) precipitated that whole flight to quality," Wong said. "It was a bellwether which set in motion a whole new attitude in hedge funds. It hurt the global macro player," such as the Quantum Fund.
Quantum was able to recoup some of the Russia losses and earned 35 percent in 1999 thanks to its switch into technology, while Quota, with $1.3 billion in assets, earned 19 percent.
Soros told investors he would rename Quantum Endowment Fund and "engage in a variety of less volatile macro and arbitrage strategies, with a smaller portion of the assets devoted to stock picking on the long and short side." He was unavailable for comment to elaborate on those plans.
Druckenmiller and Roditi will keep "substantial" investments in the funds, Soros said. Druckenmiller is going on a sabbatical, while Roditi plans to retire, Soros said. Soros Fund Management has about $12 billion in assets.
Duncan Hennes, a former Bankers Trust treasurer who joined Soros as chief executive last September, will be in charge of risk management of the fund.
"To me, it looks like Hennes is putting together more of a corporate-like structure, with less volatility that will be around in 20 or 40 years," said Michael Ocrant, editor of Mar-Hedge newsletter. "The former strategy no longer works."
A move away from risk?
Hedge funds are unregulated pools of money that use riskier strategies like derivatives and short-selling to boost returns. By leveraging their investments, hedge funds can boast substantial returns. However, when the bets go against the fund, the losses can be huge.
In 1998, Long-Term Capital Management, the hedge fund run by former Salomon Inc. Vice Chairman John Meriwether, roiled markets when the fund made a bad bet on interest rates. The Federal Reserve stepped in to negotiate a $3.6 billion bail-out plan. The fund ultimately paid back $1.3 billion to investors, but many on Wall Street regarded the fund's near-collapse as a warning sign for high-flying hedge funds.
Unlike most mutual funds, hedge funds require substantial minimum investments of $500,000 to $1 million. The typical shareholders are foundations, pension funds, university endowments and wealthy investors. But even though most individual investors can't get into hedge funds, the funds can have a dramatic effect on Wall Street.
And as a hedge fund grows in asset size, it may become unwieldy and more difficult to manage, something Soros was facing as Quantum soared to $10 billion in assets.
"Generally speaking, any fund is going to get its best performance in its early years," said Jones, of Van Hedge Fund Advisors. "There's less money, the fund is more nimble, the manager is more hungry."
Colvin, of Tremont Advisors, agrees a big hedge fund can't escape from inefficiencies.
"If you're way too big, too large, then your ability to manage disappears," Colvin said.
Unlike Robertson, who looked for unloved value stocks, Soros had an aggressive style. He moved investments from stocks to bonds to currencies, depending on conditions, to take advantage of shifting markets.
Soros was nicknamed "the man who broke the pound" after making a successful $10 billion bet against the British pound.
But Soros has not seen all his big financial bets succeed in recent years. He failed to call the 1987 global stock market crash, and during 1994 lost substantially on short-yen positions, with Quantum reportedly losing $600 million in one day in February 1994.
-- Reuters contributed to this article.