Hedge-fund icon Stanley Druckenmiller is quitting the business after three decades, telling investors he’d been worn down by the stress of trying to maintain one of the best trading records in the industry while managing an “enormous amount of capital.”
“For 30 years I’ve been responsible for managing client money and it’s been a joy, but at some point I need to move on,” Druckenmiller, who made $1 billion for George Soros by forcing a devaluation of the British pound in 1992, said in a two-hour interview on Aug. 17. “Thirty years is enough.”
Druckenmiller, 57, said he’s frustrated by his failure in the past three years to match returns that had averaged 30 percent annually since 1986. His Duquesne Capital Management LLC, which oversees $12 billion and has never had a losing year, is down 5 percent in 2010.
“You may remember that I chose to leave Soros Fund Management 10 years ago because the challenge of managing an enormous amount of capital was having a clear impact on my ability to perform, as well as my state of being,” Druckenmiller wrote to his 100 clients yesterday. “Unfortunately, as Duquesne has grown, these factors have again emerged.”
Druckenmiller built his reputation making large bets on macroeconomic themes that he spotted before others, a skill he shares with legendary traders including Bruce Kovner, Michael Steinhardt and Soros, the Hungarian-born billionaire and his former boss. The decision to shut Duquesne suggests that in an era in which the biggest hedge funds oversee $30 billion and are adding even more assets, they may no longer be able to routinely outperform conventional funds by wide margins.
Duquesne returned about 11 percent in 2008, when hedge funds on average lost a record 19 percent, and rose about 10 percent in 2009, when the average gain was 20 percent.
“I felt I missed a lot of opportunities in 2008 and 2009, and a huge move in bonds this year,” he said during the interview in his New York office on 57th Street overlooking Central Park. In the past three years, his returns have trailed those of the 10 portfolio managers who manage about half of Duquesne’s capital -- a first.
Rising assets are “an issue for the largest hedge funds,” said Don Steinbrugge, chairman of Agecroft Partners LLC, a Richmond, Virginia-based consulting and marketing firm for hedge funds. “A lot of these hedge funds have too much money. Their skill set is being diluted over a very large asset base.”
Druckenmiller said he’s been thinking about retiring since he left Soros Fund Management LLC 10 years ago. He became serious about the idea three or four weeks ago, when Johann Rupert, a friend and chief executive officer of Cie. Financiere Richemont SA, the world’s largest jewelry maker, invited him to play in October at the Alfred Dunhill Links Championship in Scotland, a golf tournament in which both professionals and amateurs compete.
‘Are You Crazy?’
Druckenmiller declined, saying he couldn’t leave the office, given the history of volatile markets in October.
“Are you crazy?” was Rupert’s reply, according to Druckenmiller. “You’ve been doing this for 30 years. You are a billionaire. You can’t take a couple of days off to play golf?”
“I’d had that same thought a hundred times,” Druckenmiller said. He said almost every family vacation had been interrupted by a work emergency.
Druckenmiller will create a family office overseeing some of his fortune, estimated at $2.8 billion by Forbes magazine, when he winds down the firm and returns money to clients sometime in 2011.
“I plan on managing a decent chunk of my money, but only an amount that will be fun,” he said. He will invest with Duquesne portfolio managers who are planning to open their own hedge fund.
Slow Growth Seen
Druckenmiller, an established philanthropist, said he intends to spend more time with his family and friends, play golf during the week and work on his charitable pursuits, including Harlem Children’s Zone, a New York charity he chairs and to which he’s given more than $25 million. He’ll also continue to follow the Pittsburgh Steelers, the National Football League team he tried unsuccessfully to buy in 2008.
While financial markets have been volatile, he said that’s not the reason he’s closing his firm.
“I’ve been through difficult markets before, and I’ve always been able to meet my standard” for investment returns, he said. While Druckenmiller doesn’t expect the U.S. to slip back into recession, he sees growth remaining weak as banks lend less and companies hold back on hiring and capital expenditures.
He’s concerned that with interest rates near zero, neither the government nor consumers will pay down their debts.
“We are setting ourselves up for a much worse problem if we don’t deleverage,” he said.
Druckenmiller has run Duquesne since 1980, even while working for two other organizations, mutual-fund manager Dreyfus Corp., from 1986 to 1988, and Soros Fund Management, where he was chief strategist from late 1988 to 2000. Both Soros and Dreyfus Chairman Howard Stein wanted Druckenmiller badly enough to let him continue managing his own fund.
He made some of his biggest trades working with Soros, including one that cemented Soros’s reputation as a preeminent speculator: A $10 billion bet in September 1992 that the Bank of England would be forced to devalue the pound.
Breaking the Bank
By August of that year, Druckenmiller said he had initiated a $1.5 billion trade that would profit if the German mark rose versus sterling. He expected Europe’s exchange-rate mechanism, in which the currencies moved against each other within a limited band, to come under pressure as Germany raised interest rates to prevent inflation after reunification. Germany’s move forced the United Kingdom and other members of the ERM to decide whether to increase rates, which could damage their already troubled economies, or devalue their currencies and fall out of the ERM.
Druckenmiller said he calculated that the Bank of England didn’t have enough reserves to prop up the currency, and it couldn’t afford to raise rates. He was right, and selling by the Soros fund is credited with pushing the pound out of the ERM.
“He was so proud because until that point Soros had never made $1 billion on a bet,” said Roger Entress, a Pittsburgh surgeon and early Duquesne investor, who was golfing with Druckenmiller at the National Golf Links of America in Southampton, New York, the weekend before the devaluation.
It turned out to be a big year for Druckenmiller. He said he made another $1 billion a few months later betting on a decline in the Swedish krona. There were additional profits from trades tied to the ERM unraveling, including a bet that British stocks would rise thanks to lower interest rates, and European bonds would jump in price.
Druckenmiller’s friends say the money isn’t the reason he’s continued to trade long after becoming wealthy.
“It’s about winning -- he’s a fierce competitor,” said Kenneth Langone, 75, a co-founder of Home Depot Inc. and an early Duquesne investor who calls Druckenmiller one of his closest friends.
Druckenmiller is a so-called macro trader who seeks to profit from broad economic trends by trading stocks, bonds, currencies and commodities around the world. It’s a strategy pursued by some of the longest-standing and best-performing managers in the $1.65 trillion industry. Kovner, founder of Caxton Associates LLC, Tudor Investment Corp.’s Paul Jones and Louis Bacon, who runs Moore Capital Management LP, have all been in the business for more than 20 years and have produced average annual returns exceeding 20 percent.
Getting It Wrong
Druckenmiller has been able to outpace them over so many years in part because of a lesson driven home by Soros: When you’re sure you’re right, no trade is too big. And the bigger your gains in a year, the more aggressive you can be.
“It takes courage to be a pig,” is Druckenmiller’s motto, and he has a yellow porcelain pig named Jerome on his desk to remind him.
He’s also quick to change his mind when he’s wrong. Druckenmiller said he reversed a bet that U.S. stocks would fall the Friday before the Oct. 19, 1987, stock market crash, thinking that the week’s 9 percent decline in the Dow Jones Industrial Average had been overdone. Over the weekend, after studying trading charts and talking to Jack Dreyfus, who founded the Dreyfus mutual funds where Druckenmiller was then working, he knew he was wrong, Druckenmiller said.
On the following Monday morning, he took advantage of a brief rally to sell his holdings. The Dow lost more than 22 percent that day and 13 percent for the week. He finished the week with a profit.
Druckenmiller said his success is in part due to lessons he learned from his mentor at his first job at Pittsburgh National Bank, Speros Drelles.
The Investing Game
Drelles taught him to use technical analysis to help gauge whether prices were poised to jump, while most analysts depended on a company’s financial reports to decide whether a stock was a good buy. If a company has good charts and fundamentals, he’d put it in the portfolio. His training as an economist also helped him identify big macro themes, such as housing starts, retail spending and unemployment that would cause shares to climb or swoon.
“I’ve always loved to play games, and face it, investing is one big game,” he said. “You need to be decisive, open- minded, flexible and competitive.”
Druckenmiller, who says his mother-in-law calls him an idiot savant, said intelligence is necessary, though only to a certain level. He said it’s a waste of resources that people who might have pursued careers in science or engineering have flocked to Wall Street instead in the past two decades.
“You need to have a certain amount of intelligence, but it’s wasted over a certain level,” he said. “After that it’s more about intuition.”
Druckenmiller’s drive to win extends to every contest he enters, be it horseshoes, bocci or golf, which he’s played since he was a child. He has a lower-than-average 7 handicap.
On the golf course, his sense of humor and his love of winning are always apparent, said Doc Hedreen, a friend and longtime investor. Hedreen recalls a recent game in which Druck, as his friends call him, hit a powerful drive of 300 yards.
“It was a toe shot,” said Druckenmiller, who stands six- feet, five inches (1.9 meters), using the term for a badly hit ball, in an effort to psyche out his friend by suggesting the drive could have been even longer.
Druckenmiller studied English and economics at Bowdoin College in Brunswick, Maine, where he earned money playing poker, as well as running a hot dog stand with fellow student Larry Lindsey, who later became a Federal Reserve governor. He briefly operated a casino at a fraternity house.
After graduating in 1975, he entered a doctorate program in economics at the University of Michigan, hoping to become an academic. He quit in his second semester, finding the courses too theoretical.
He took a job at Pittsburgh National Bank as an equity analyst and quickly was promoted to chief of research and then, at age 26, head of investments. In 1980, after the head of a New York securities firm offered Druckenmiller $10,000 a month to give him advice, he opened Duquesne with $1 million in separate client accounts, a secretary and an analyst from the bank. When that securities executive ended up in prison a few years later, and Druckenmiller’s monthly stipend vanished, Entress let him live in an apartment he owned rent free.
In 1986, Druckenmiller, strapped for cash, was lured by Stein to Dreyfus, where he ran the country’s top-ranked mutual fund. That same year, he borrowed $75,000 from a friend to start a formal hedge fund, meaning it charged 1 percent of assets and 20 percent of any profit he made.
Soros recruited him near the end of 1988. He thought he’d be fired after a year given the mercurial nature of his new boss, and thought of it as the finishing touches on his investing education. Within the first six months, Soros had sold one of his bond positions when Druckenmiller was out of the office, and the younger man called Soros swearing and threatening to quit. Soros promised he’d leave the management of the fund to Druckenmiller and moved to London.
“Now we’ll find out whether I’ve just been in your hair too much or whether you really are inept,” Druckenmiller recounts Soros as saying.
Left alone, Druckenmiller made money, and the collaboration lasted until April 2000. In the first four months of that year, the $9 billion Quantum Fund had lost 22 percent on a wrong-way bet on technology shares, and Druckenmiller decided he’d had enough, having climbed out of a similarly sized hole the previous year to end up 35 percent. He made $3 billion on his technology bets in 1999 and 2000.
At that time, he said one reason he wanted to leave Soros was the firm, at $22 billion, was managing too much money. Duquesne had $2 billion then.
Druckenmiller said he will continue to focus on philanthropy. Last year he and his wife Fiona, a former Dreyfus fund manager, gave $100 million to the New York University Langone Medical Center to establish a neuroscience center. He’s contributed at least $30 million to Bowdoin since 1991, and manages its endowment for free.
His biggest cause has been Harlem Children’s Zone, an organization run by fellow Bowdoin graduate Geoffrey Canada, which aims to eradicate poverty in a 100-block area of the New York neighborhood by providing education, health care and job training to the community.
President Barack Obama has called for the creation of “Promise Neighborhoods” across the country based on the HCZ model.
“It’s not just the direct giving,” said Canada, who talks to Druckenmiller almost every day and sees him in Harlem once a week. “He’s a no-nonsense guy and he brings a real discipline. We’ve built this organization together.”
Asked whether he expects other hedge-fund managers in their fifties to follow him into early retirement, Druckenmiller said it’s harder for those with bigger firms to disband.
“But they’ll be jealous,” he said.