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Taking stock of George Soros, the SEC and Quantum

Soros | Taking stock of George Soros, the SEC and Quantum Ian Fraser

It's kind of ironic. The reason that billionaire investor and philanthropist George Soros gave for his recent decision to close the Quantum Endowment Fund to outside investors was that he doesn’t particularly want the $25bn vehicle to face regulatory scrutiny.

New regulations brought in with the Dodd-Frank act mean that any US-based fund with assets in excess of $150m must register with the Securities and Exchange Commission (SEC) by April 2012, and must then provide full details of its investors, employees, assets and potential conflicts of interest.

Soros doesn't like the sound of this. To avoid it, the legendary investor has opted to convert his fund into a “family office”. This means the 80-year old Hungarian émigré -- dubbed “The Man who Broke the Bank of England” for his role in forcing the UK to leave the EU's exchange rate mechanism in 1992 -- will hand back $1bn of the $25bn fund to investors (the rest belongs to him and members of his family). He’s also parting company with chief investment officer Keith Anderson, formerly of BlackRock, who some have blamed for the fund’s poor performance over the past 18 months.

Hypocritical move?

But Soros’s decision to effectively wind up the Quantum fund out of mistrust of meddling regulators strikes some as hypocritical. As the BBC business editor, Robert Peston, tweeted:

"Soros said deregulation was crash cause, so am amused he turns his hedge fund into family office to avoid tighter regulation by SEC."

Back in January 2009, when the global financial crisis was very fresh in people’s minds, Soros blamed the crash on weak regulation. In an article in the Financial Times he advocated tighter controls of credit default swaps (CDS) and recommended that derivatives should be as closely regulated as stocks and shares. He wrote:

"The issuance of stock is closely regulated by authorities such as the SEC; why not the issuance of derivatives and other synthetic instruments?”

There may well be other reasons for Soros's decision to close Quantum to external investors, including his age (he turns 81 next month) and the fact the fund he co-launched with Jim Rogers in 1970s has latterly become more of a 'safe haven' than a 'swashbuckling speculator' (see Barry Ritholtz's Big Picture blog), which may have diminished its appeal to outsiders. It might even be that external investors are melting away owing to poor performance (for more on recent returns, read Gregory Zuckerman in The Wall Street Journal).

Portrait of the investor as a young man

Whatever the motivations, the development prompted some insightful analysis of Soros's famed investment style. The FT's Lex explained that the philanthropist's approach revolved around making “big bets” which are often more based on “animal instinct” than cerebral analysis.

“Prodigious leverage was employed in some of the most successful ones, including a sterling devaluation in 1992, which produced a $1.8bn gain. Such wagers are tough to explain to regulators and even tougher to keep quiet, which is just one reason why discretionary “macro” managers such as Mr Soros are growing scarce … the world of investing will be a duller place."

Anthony Peters, writing in the Thomson Reuters title IFR, said:

"Big investors, the really smart ones ...  succeed because they have views which ... enable them to divorce themselves from the daily ambulance chasing which most investment managers seem to find themselves involved in ...

“Proper hedge funds have no politics, they don’t care about pretty speeches; they are like Barcelona FC – they expose all and any defensive weaknesses and, having done that, score at will. I must add, though, that they can also get it wrong  ... In 1992 the UK took the medicine, disembarked from the train heading for the single currency and never really tried to jump on it again ...

"Hedgies are the markets’ equivalent of a free press … Their very purpose it to be able to move around outside the realm of regulation and to act on instinct and not according to a canon of imposed rules."

Peters's overall message -- with which I agree -- is that far from being "locusts", hedgies such as Soros can sometimes do the world a service, in that they expose and undermine flawed macroeconomic policies. Without Soros, Britain might even have been in the euro by now, and for that I am prepared to forgive him any hypocrisy over regulation.

Further reading on George Soros, financial regulation and hedge funds:

Tags: BBC , BBC business editor , BlackRock , CDS , credit default swaps , Dodd-Frank Act , euro , financial regulation , Financial Times , FT , George Soros , Gregory Zuckerman , hedge fund , hedge funds , Keith Anderson , Lex , macroeconomic policies , macroeconomic policy , Quantum Endowment Fund , Quantum fund , Quantum investment , regulation , Robert Peston , SEC , Securities and Exchange Commission , The Wall Street Journal , Thomson Reuters , WSJ
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