Druckenmiller Will Retire As Soros Shakes Up Firm

By KEN BROWN and PAUL BECKETT Staff Reporters of The Wall Street Journal
Updated May 1, 2000 2:54 a.m. ET
NEW YORK -- Relaxing with his family at his Florida vacation home in late March, Stanley F. Druckenmiller, the longtime No. 2 in George Soros's mighty hedge-fund empire, was startled by the news that Julian Robertson, another industry titan, was calling it quits. Mr. Druckenmiller quickly called the Tiger Fund manager and asked, "What does it feel like?"
"It's more emotional than I thought, but it's the right thing to do," Mr. Robertson replied.
"I was haunted by that moment for the next several weeks," Mr. Druckenmiller recalls. On Friday, he too threw in the towel, retiring as the manager of Mr. Soros's $8.2 billion Quantum Fund, the best-known hedge fund -- or privately held investment pool for institutions and wealthy individuals -- in the world.
Like Mr. Robertson, the reason was simple: While Messrs. Soros and Druckenmiller in the 1990s had heads of state quaking over their next move, he couldn't figure out how to make money in today's roller-coaster U.S. stock market. Like many average investors, the men piled into biotechnology and high-tech stocks -- only to be stung by steep losses that pushed the Quantum Fund down 21.7% so far this year.
Knockout Blow
After averaging annual returns in excess of 30% for 31 years, including a 35% rise in 1999, that might seem like blip. But, it has amounted to a knockout blow for Soros Fund Management LLC, prompting the biggest shake-up in personnel and strategy since Mr. Soros, the 69-year-old Hungarian-born billionaire financier and philanthropist, founded the firm in 1969.
Soros to Appoint First CEO to Steer Hedge-Fund Firm (Aug. 10, 1999)
Druckenmiller's Quantum Is Burned By Bad Bet on the Yen's Direction (March 11, 1999)
Soros to Close Hedge Fund, Cites Global Market Turmoil (Oct. 27, 1998)
Also on Friday, Nicholas Roditi, the London-based manager of the $1.3 billion Quota Fund, which has lost a third of its value this year, stepped aside, the firm said. Quantum, known for making huge "macro" bets in foreign-currency movements and global bonds, will be recast as a more-conservative fund and will be renamed the Quantum Endowment Fund. The fund has been hoarding cash in preparation for an investor exodus.
What is left is a far tamer beast that will take fewer risks and expect lower returns, a strategy designed to satisfy Mr. Soros's needs for income and estate planning as well as his charity work.
Mr. Druckenmiller's departure follows two tumultuous years for the Quantum Fund. In 1998, it suffered through bad bets in Asia and Russia. Last spring Mr. Druckenmiller had been down as much as 20%, before he made it back with big bets on technology and bio technology stocks. But he stayed too long and those bets proved to be his un doing, especially because his fund's size prevented him from exiting quickly.
"I had decided I had overstayed my welcome, then I had a huge execution problem," Mr. Druckenmiller says, in an interview. The sell-off was especially painful in some smaller tech and biotech names, including firms such as Veritas Software, Verisign and Brocade, all of which fell by at least 50% in the tech swoon.
"I'm not so hot in equities," Mr. Druckenmiller concedes.
Consider Celera Genomics Group, a gene-research concern. Quantum bought the stock in October at $40, sold half near the end of the year when it hit about $80, and then rode it up to a stunning high of $250, when he sold out. But as the stock tumbled, he bought in again at $150 earlier this spring and watched as Celera lost half its value. "In the old days, I would have bought Celera at $40, sold at $80 and moved on to a macro bet," Mr. Druckenmiller said.
Burned on Biotech Stock
Getting burned on a biotech stock is a far cry from the fund's earlier globe-trotting days. It netted a billion-dollar profit in 1992 on a bet against the British pound and a few years later earned the wrath of Malaysian Prime Minister Mohammed Mahathir, who accused Mr. Soros of betting against his currency.
But the market inefficiencies that allowed big profits on such bets have become rarer and more difficult. Quantum, for example, lost almost $2 billion in the aftermath of the Russian debt default in 1998, while the rise of Europe's new common currency has dashed hopes of big currency bets within Europe.
Indeed, Mr. Druckenmiller sees the entire investing landscape as dangerous, and while he was confident he could bring the fund back into positive territory last year, this time around he harbored no such illusions. About three weeks ago, he began selling off his holdings to meet the shareholder redemptions he expected once his resignation became known, before the major tech correction.
But Quantum proved as difficult to turn as a 1972 Cadillac, leaving it vulnerable to the worst of the downdraft, even while providing others with buying opportunities.
Felt Some Pain
"I have heard his name associated with stuff I've bought over the past couple of weeks," says Blaine Rollins, manager of the $47 billion Janus mutual fund, though he adds that the selling helped crush some of his existing holdings. "Veritas, I felt some pain there," he says.
Speaking in his modest midtown Manhattan office that is filled with more than 20 pictures of his wife and three daughters, Mr. Druckenmiller, 46 years old, says he will continue to work through the end of the month. Then he will travel to South Africa with his family, and spend the rest of the summer with them, before deciding what to do next. But he guarantees it won't be running a public fund.
Mr. Druckenmiller, whose personal wealth is estimated at $800 million, says he had been discussing his departure with Mr. Soros since the end of 1998. But then Quantum tumbled 20% in early 1999, and he didn't want to quit while he was down. As the fund rebounded, "I temporarily fell in love with the business again," he says.
But when the fund, which until last year hadn't been down more than 10% in a year while he was running it, fell 20% again this year, he decided to bail.
The past two years have been difficult for the Quota fund as well, and Mr. Roditi, 54, was becoming similarly disillusioned with managing the fund, Mr. Druckenmiller says. The two men began discussing their joint departure several weeks ago when Mr. Roditi visited New York. A publicity-shy native of Zimbabwe, Mr. Roditi, too, gave substantial returns to investors since Quota's launch in 1992, only to find himself squeezed by the declining opportunities for "macro" bets.
Benefit of Hindsight
"With the benefit of hindsight, we probably should have given all the money back 18 months ago and bowed out on the crest of the wave, rather than just below it," says Richard Katz, chairman of the Quota Fund. Through a spokesman, Mr. Roditi declined comment.
Mr. Soros, in an interview, says Quota will remain aggressive, but try to profit from stock-picking rather than big macro bets. The fund will be run by Mr. Roditi's handpicked successor, Michele Ragazzi.
The high-level departures come at a time of great change within Soros Fund Management itself. For years, it fostered an entrepreneurial culture, with a cadre of employees battling wits to persuade Mr. Druckenmiller to invest.
"He didn't scream, but he could be very tough. It could be three days or three weeks of battling it out until he's convinced, or you're defeated, which was usually the case," says Richard Medley, a Soros managing partner until 1993 who now runs his own advisory firm.
More-Organized Structure
Then, in early 1998, the firm tried to impose a more-organized structure. Analysts for the first time were assigned areas of coverage after years of following whatever stocks appealed to them. But the analysts complained that fund managers ignored their recommendations. In April 1999, in an effort to overcome that disconnect, Mr. Soros made a rare appearance at a Monday staff meeting and told analysts, who had never run money of their own, they would be given $50 million to invest in "mini accounts" under the Quantum umbrella. "It's a very good way for motivating talent," Mr. Soros says.
Besides giving analysts some investing authority, Mr. Druckenmiller had by then ceded some power to pick stocks to other managers. But after the fund slipped last year, he reclaimed control.
Mr. Soros says the Quantum Endowment Fund will now be run by a group of managers overseen by Duncan Hennes, the former treasurer of Bankers Trust Corp., now part of Deutsche Bank AG. Mr. Hennes was hired last year as the firm's first chief executive officer-another sign of the firm's more-conservative nature.
The fund won't make any big wagers on currencies or interest rates. "Our days of big macro bets are over," Mr. Soros says. "We are bringing an epoch to an end."