After 30 years in the hedge-fund business, Stanley Druckenmiller who helped George Soros "break" the Bank of England in 1992 has thrown in the towel, says Portfolio.com. "In what may be the supreme act of power, he has essentially fired himself," announcing plans to wind down his £12bn Duquesne Capital Management fund because he is "dissatisfied" with its performance.
Druckenmiller, 57, has ranked for decades among the world's most successful macro hedge-fund managers, returning an average 30% a year, notes FT Alphaville. He hasn't made a loss yet. But in a candid letter to investors, he highlighted the "high emotional toll" that managing such a huge amount of capital had taken. The final straw came when a friend invited him to Scotland to play golf this autumn. Druckenmiller said he couldn't possibly leave the office. "Are you crazy?" replied his friend. "You are a billionaire. You can't even take a couple of days off?"
An avid poker player since he was 11, Druckenmiller is a natural trading talent with nerves of steel, says Financial World. "I think I've found my clone," remarked Soros when he hired him in 1988. Raised in Virginia, he joined the Pittsburgh National Bank, rising to become director of investments by the time he was 27. A year later, in 1981, he left to start Duquesne Capital with just $1m. He continued to run the fund after being hired, first by the New York-based Dreyfus Fund and then by Soros Fund Management. Druckenmiller has spent all his adult life immersed in markets. "Family gatherings are a convention of Wall Street smart money." His wife is the niece of legendary trader Barton Biggs.
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Swiftly emerging as Soros's "key triggerman", Druckenmiller's forte was currency speculation. His most celebrated series of trades took place in September 1992, when he placed up bets on the deutschemark and down bets on sterling and the lire. The $10bn bet against the pound alone yielded profits of $1bn after the move sparked a sterling crash and Britain's ejection from the European Exchange Rate Mechanism.
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Although Soros took most of the public credit (and vilification), insiders at the fund insist that Druckenmiller was the prime mover, notes The Guardian. "Make no mistake, shorting the pound was Stan Druckenmiller's idea," recalls Scott Bessent, in Inside the House of Money. "Soros's contribution was pushing him to take a gigantic position." Stan's "gamesmanship" and George's ability to size trades made the partnership.
"It takes courage to be a pig," is Druckenmiller's motto, observes Bloomberg Businessweek. But it seems enough is enough. Worth an estimated $2.8bn, he will continue to manage "a decent chunk" of his money when he winds down Duquesne in February. "But only an amount that will be fun."
The death of the hedge fund?
One reason Druckenmiller eventually parted company with George Soros was his belief that Soros's fund had become too big and unwieldy. The same thinking may underpin his move to shut Duquesne, says Bloomberg BusinessWeek. The industry's most glittering returns have often come from smaller, younger outfits. Yet the regulatory clampdown, post-crisis, is tilting the industry towards ever-bigger firms incapable of outperforming conventional funds by wide margins. Where's the thrill in that? Druckenmiller's retirement could signal a rush for the exit.
That won't help an industry already struggling to reassure "queasy investors", says The Economist. Hedge funds used to justify their exorbitant fees (typically 2% of assets and 20% of returns) on the grounds that they were delivering "absolute returns" making money regardless of the financial weather. That illusion was shattered in 2008 when average returns fell to -19%. Investors have begun voting with their feet.
About time, says James Mackintosh in the FT. Some of these outfits are little more than "overpriced mutual funds". Others, reliant on "exotic derivatives, computer programmes, or the brilliance of their founders", are way too risky. As investors in Fortress Investment Group have just discovered, the "worst danger" with hedge funds is that you won't get your money back because esoteric "assets" remain unsellable. And while some funds do deliver, in most cases why pay "Cipriani prices for what often turns out to be a cheeseburger and fries?"
So are we witnessing the "death of the hedge fund"? Not likely, at least not yet. As Tracy Corrigan reports in The Daily Telegraph, "the usual trickle of hedge fund start-ups has turned into a flood" this summer because of a mass exodus of traders from investment banks hoping to become "the next George Soros or John Paulson". Whether or not they pull it off, of course, is an entirely different matter.
