The Man Who Moves Markets

There is a point beyond which self-revelation can be damaging, and one of the flaws in my character, which I have not fully fathomed, is the urge to reveal myself.

--George Soros, The Alchemy of Finance, 1987

It is a hot day in New York, and something unusual is about to happen on the 33rd floor of a building at the corner of 57th Street and Seventh Avenue. These are the offices of George Soros, the most powerful and successful investor in the world, a man whose actions and utterances can rock world financial markets, infuriating central bankers and playing a major role in derailing the European currency system.

George Soros is about to give an interview. And Gerard Manolovici, a veteran Soros portfolio manager, is upset. "Gary, you've got to stop it," he says to Gary Gladstein, Soros' chief administrator. "I'm serious. You've got to stop this story."

Gladstein smiles. "We don't like publicity around here," he explains to a reporter. "We like to keep a low profile." But if the Soros investment managers are loath to reveal themselves to the world, that sentiment is not--nowadays--shared by their complex, billionaire overlord. For the better part of a year, Soros has been regularly making his views known to the world--but only rarely through interviews such as his talk with BUSINESS WEEK. He prefers to avoid the media middleman--the American press in particular. Instead, he communicates his views directly--by articles in newspapers, statements to wire services, and letters to the editor, all written in a distinctive style that combines courtliness, scholarship, and, at times, a touch of condescension.

RIDING HIGH. Soros' public statements have made central bankers cringe--particularly in Europe, where exchange-rate mechanisms force them onto the opposing side of Soros' trades, and where, more often than not, they wind up as losers. Soros' latest pronouncement, made on German TV, was reported to the world on Aug. 4: He is selling the mark and buying dollars. And sure enough, as if by magic, the mark declines, the dollar rises.

When Soros disclosed his 14% stake in Newmont Mining Corp. in late April, investors bought Newmont stock, other mining stocks climbed, and bullion bounced. And the world of global real estate is now agog over his partnership with the fallen real estate giant Paul Reichmann of Olympia & York Developments Ltd. Soros and Reichmann are jointly embarking on $1.5 billion in commercial projects in Mexico City and are exploring other ventures that could help bring commercial real estate out of its prolonged depression. But in the interview, Soros was conspicuously untalkative about gold and real estate--and he sternly denied speculation he is betting on a revival of global inflation.

Soros is riding high. He has apparently managed to sidestep the only major threat to his stature in recent years--the Treasury-auction scandal at Salomon Brothers Inc. Soros and his management firm have been named in a class action suit as participating in the scandal, but they have never been cleared--or charged--by federal authorities. But Gladstein, in the firm's first public comment on Salomon, says that the Soros organization has been assured it is not a target of any federal investigation. Gladstein says the Soros people do not intend to settle the litigation and "hope" that they will be dropped from the suit.

INTELLECTUAL GAME. Soros is more than just an ultrarich global investor. He has also underwritten a philanthropic empire that makes him the single most influential private citizen between the Rhine and the Urals (table, page 58). Soros is an outspoken opponent of rampaging nationalism and a defender of democracy and free enterprise. His views seem routine until you consider that he is putting his money behind them, in one of the most significant private-relief efforts in this century.

In Eastern Europe and the former Soviet republics, Soros' foundations have given $300 million to a broad range of educational and social-reform causes. It is more than just charity. "He invests his philanthropic money," observes Jeffrey Sachs, a Harvard University economist and adviser to the Russian and Polish governments on economic reform. It is an intensive effort to mold a generation of Eastern European leaders.

Soros has more money now, he acknowledges, than he can possibly spend. But as he puts it, "The more money I make, the more money I can give away." Money-making for Soros now is an intellectual enterprise more than anything else--an exercise in "reflexivity," his complex theory of investing.

Contrarianism combined with an analysis of economic cycles and market psychology have been the underpinnings of Soros' investment style over the years. In 1985, his best year, his contrarian analysis of the Reagan era--the "imperial circle," as he called it--led him away from the cyclical stocks that were being promoted on the Street and toward financial services and takeover stocks, which soared. That same year, he made a huge killing on the much-out-of-favor yen. In October, 1987, he predicted a crash--in the Japanese market, not the U.S. He still managed, however, to reap a 14% gain in '87, while most investors took a bath. His Japanese prediction ultimately paid off, when that market began to tank in late 1989. His audacious bet against the British pound last year stemmed from his savvy reading of Britain's economic malaise and a belief that, despite strong statements to the contrary, Britain would abandon the European exchange-rate setup rather than continually defend

the pound through repeated and expensive interventions in the currency


Since 1969, when it was established, his flagship investment vehicle, the Quantum Fund, has realized an unparalleled 35% annual return. No other investor has produced better results for such a long period--not Peter Lynch, not Warren E. Buffett. Quantum has had its troubles, such as the 23% decline in 1981, its only down year. But unlike, say, the Magellan Fund in the Lynch era, Quantum did not enjoy its best years at an early age, while it was still small and nimble. Quantum is in a class by itself in the investment world: It can leap like a gazelle even though it has reached elephantine size.

OFF THE MARK. In 1992, Quantum began the year at $3.1 billion. By yearend, it had rocketed a staggering 68.6%, with much of that paid out to investors in cash or shares of a new realty fund. Those payouts kept the fund from ballooning, but it was still an immense $3.7 billion at the end of 1992. Even so, Quantum has gained an additional 45% so far this year, mainly because of Soros' currency speculations.

It was the $1 billion coup in the pound that turned Soros into a global investment superstar. He was the man who "broke the Bank of England," as Fleet Street dubbed him. And that is only a mild overstatement--for he did indeed nudge Britain out of the European exchange-rate mechanism last September. "Black Wednesday--or White Wednesday, as some of us call it," is how Soros puts it. More recently, in June, Soros wrote a letter to The Times of London stating strongly that the mark would decline, and explaining why: The German central bank, he felt, had kept interest rates high for too long. The Bundesbank, he argued, would have no choice but to reduce short-term rates sharply. Soros backed up his comments, as usual, with cash--by shorting the mark. In June, his Quantum Fund climbed 10%--a gain of some $400 million, no doubt stemming from his currency trading.

Soros insists he did not sell francs after his latest round of public pronouncements. First, he said in Le Figaro on July 26 that he would not short the franc because he did not want to be blamed for derailing the exchange-rate mechanism. But then, the Bundesbank decided not to lower the discount rate--contrary to Soros' admonition--and so Soros dashed off a statement on July 30, saying that he now felt free "to resume trading in the French franc." He said: "It is futile to attempt to protect the European Monetary System by abstaining from trading in currencies when the anchor of the system, the Bundesbank, acts without regard to the interests of the other members."

ELDER STATESMAN. Why the jawboning? Soros' inconsistent--some might say capricious--attitude toward public statements exasperates his critics, particularly the central bankers and other currency traders who lose when comments by Soros move the markets against them. In his BUSINESS WEEK interview, Soros reflects on his stance toward publicity. When the sentence in his 1987 book, The Alchemy of Finance, about the "character flaw" of self-revelation is read to him, Soros' face breaks into a broad grin. "It's something that troubles me. I try to find the right balance," he explains, adding: "I'm no longer actively involved in the running of the fund."

That has been Soros' longtime position--that he is an elder statesman of investing, disconnected from the operations of his fund. And it's true that Soros leaves the day-to-day management, such as routine stock-picking, to a New York staff of 14 investment pros, headed by Gladstein and including such luminaries as Manolovici, an authority on emerging markets; Stanley Druckenmiller, Soros' No.1 global market strategist; and Evan Marks, a 35-year-old former real estate ace at Wasserstein, Perella Group Inc., who is spearheading Soros' foray into global real estate.

But Soros is still very much Quantum's CEO. He keeps in daily contact with the fund and is consulted, Gladstein acknowledges, before every major trade. "He's always reachable," says Gladstein. And no wonder: Soros Fund Management, which operates Quantum and its four other investment vehicles, is organized not as a corporation or even a partnership. It is a sole proprietorship, 100% owned by Soros.

To understand Quantum, you must dig into Soros' past--particularly his crucial experiences in the Holocaust. Soros says so himself in Alchemy. Under his father's tutelage, "the Second World War served as an advanced course at a tender age," says Soros in the book. "As the reader shall see, the investment vehicle I created a quarter of a century later"--Quantum--"drew heavily on skills learned as an adolescent." But the reader does not see. Nowhere in this book, or in any of his other writings, does Soros relate his experiences as an adolescent in any meaningful detail. The key to his fund--and his life--is the art of survival.

Soros was born to an upper-middle-class Jewish family in Budapest in 1930. His father was a lawyer. For Tivadar Soros, survival was second nature. As an Austro-Hungarian prisoner during World War I, the elder Soros had survived Czarist brutality by escaping, and he managed to survive in Russia during its most turbulent era--from the Russian Revolution in 1917 through 1920, when the country was in the throes of civil war. "This was a formative experience for him. That is what shaped him--and he shaped me," says Soros. "So when the Germans came in, he was mentally better prepared than most others for the turmoil."

For Hungarian Jews, 1944 was a fateful year. Hungary had been the only major Jewish community--1 million people--under Nazi domination not yet decimated by the Holocaust. Then, some 400,000 perished, even though word had begun to filter out of Auschwitz that mass exterminations were under way. Soros and his entire family were among the fortunate.

BLOTTED OUT. It is a horrendous tale, which Soros discusses with great reluctance. His father, he says, paid for Soros to pose, using false identity papers, as the godson of an official of the Hungarian Agriculture Ministry responsible for confiscation of Jewish properties. The official had a Jewish wife, whose hiding was also financed by Soros' father. "A commercial transaction," is how Soros describes it. But it was one that forced him to travel with the official around Hungary, as the official confiscated the property of owners who had been transported to Auschwitz. At one point, he recalls, he personally delivered notices to prospective deportees who were destined for the gas chambers. He warned them. Not all believed him. "One man said: 'I have always been law-abiding. They can't hurt me.'"

Like other survivors of that era, Soros has blotted out the emotions that were so real to him half a century ago. He tells this tale in an offhand, unemotional manner. "It was a nice adventure," he says sarcastically of his 1944 experiences.

The Soros family was reunited in Hungary after World War II. Fearing the prospect of life under a communist regime, Soros made his way to London in 1947. It was his loneliness and poverty there, and not the double life he led in 1944, that he describes as "the most difficult time of my life." Postwar Britain was spartan, and longtime Soros associate Nils O. Taube recalls that Soros supported himself at the time as a waiter at Quaglino's, where rich Londoners dined and danced until the early morning hours. There he was reduced to eating leftover profiteroles when he didn't have enough money to buy a meal.

Soros graduated from the London School of Economics in 1952, but the LSE diploma proved of little immediate value. He was slogging away as a salesman of handbags and jewelry in Blackpool, a blue-collar seaside resort, when he wrote a letter to every investment bank in London. That landed him a job as a trainee at the British investment bank Singer & Friedlander. It was a break, of sorts--for Singer & Friedlander had a thriving stock market operation that fascinated Soros. LSE had taught him nothing about the markets, "and I barely knew they existed," says Soros. His general recollections of Britain are less than nostalgic. "I didn't make much of a career in England," he recalls sourly.

Through a friend, Soros obtained a job as an arbitrage trader at F.M. Mayer in New York in 1956. In those days, arbitrage was a far more humdrum form of trading than it is nowadays. Traders bought and sold identical securities in different markets to take advantage of tiny price discrepancies. Soros moved on to Wertheim & Co. in 1959 and then to Arnhold & S. Bleichroeder, an old Dresden family banking firm. At around this time, he began raising a family--he has five children, including two sons from his second marriage. The Soros brood has received little publicity, and Soros likes it that way, although he seems proud of the acclaim received by his wife, Susan, who recently founded a graduate program in decorative arts in New York.

UNPRONOUNCEABLE. In the 1960s, Soros became adept at arbitrage between the New York and London markets. It was the beginning of a pattern that was the hallmark of his career, to dive in where others were too timid or lacking in knowledge. Recalls Edgar Astaire, a London stockbroker who has worked with Soros since 1960: "The two worlds didn't interweave much. American brokers were very insular. They sold American stocks and couldn't pronounce the names of foreign company stocks, so they didn't bother with them." But Soros was different. He knew the markets, and Astaire says "he soon realized he could go out on his own managing money for others." That was 1969, when he made his first ventures into the two activities that were to dominate his life--reform in Eastern Europe and money management.

He formed the Quantum Fund early that year with his partner at the time, James Rogers. It was then, as now, an offshore fund, based in Cura ao and off limits to U.S. citizens or residents. Soros has never sponsored a U.S. investment vehicle, even though his operations are based in New York. Offshore funds are exempt from U.S. regulation. Thus they can be as adventurous in their investing as the private hedge-fund limited partnerships that operate in the U.S. But the offshore funds can grow to any size, whereas hedge funds are limited by U.S. law to 99 investors and usually require a minimum investment of at least $1 million.

Quantum, by contrast, is freely available to non-U.S. investors for as little as $29,716--the cost of one share on Aug. 6. But selling the same share would net an investor only $28,855. Quantum and its sister funds are organized much like ordinary mutual funds, but with a crucial difference: The funds are bought and sold at a huge premium over net asset value, which was $21,533.59 per share as of Aug. 6. The fund administrators periodically adjust the premium, based on their assessment of market conditions, and it is now 38% for buyers and 34% for sellers. The premium is designed to discourage trading in the fund--and is unique in the world of offshore funds, according to Antoine Bernheim, who publishes the U.S. Offshore Funds Directory.

MORE THAN ENOUGH. Soros' philanthropy is far more conventionally organized. His largess began in earnest in 1969, when he established the George Soros Charitable Trust. In 1969, it paid out $7,080 and hauled in $10 in gross income, according to a handwritten annual report filed a couple of years later with the New York State Attorney General's office. The four recipients were the United Methodist Church, a nursery school, the Encampment for Citizenship, and the International Rescue Committee.

It was more than just anticommunism that drove Soros. As a student of philosopher Karl Popper at LSE, Soros developed ideas about political systems, society, and human behavior that would engross him for the rest of his life. Popper described both fascism and communism as "closed societies" that were doomed to failure.

By the early 1980s, Quantum had grown to more than $300 million, and Soros was firmly established on Wall Street. Now, he turned his attention to undermining the communist regime in Hungary. In 1982, Soros persuaded the International Monetary Fund to withhold a loan from Hungary until the government issued passports to half a dozen leading intellectuals and dissidents whom he wanted to meet with in New York. The scheme worked.

Since closed political systems are inherently unstable, Soros reasoned that he could generate a major change by exerting just a little force. "Soros constantly chooses those points where he can influence historical events with his limited power. By choosing carefully where and how to step in, he can gain maximum impact. It's like the stock exchange and knowing at what time to intervene," says Tibor V mos, a longtime friend of Soros who is now the head of the Computer & Automation Institute at the Hungarian Academy of Sciences.

Soros won his first big bet in Hungary. Communist officials in J nos K dar's government hoped to take advantage of Soros' millions to bolster scientific research and thereby stifle growing discontent among intellectuals. Instead, the foundation's activities had the opposite effect. Says J nos Quittner, a manager of the Soros Foundation in Budapest: "The communists wanted to use him. After a short time, it was clear they could not."

Instead, academics who studied abroad under Soros Foundation scholarships came back promoting "radical" Western ideas about democracy and market economy. Language teachers sent to the U.S. to teach Russian for one year at high school came back as qualified English teachers.

One of Soros' cleverest ploys was giving hundreds of photocopiers to Hungarian libraries through the foundation in the mid-1980s. Up to that time, copying machines had been monitored by secret-service agents to prevent their use by the underground press. Soros proposed donating the machines in 1985 under the condition that they not be controlled. The government was eager to accept, because it couldn't afford to buy them with its ever-shrinking reserves of hard currency. V mos recalls: "After that, the secret service stopped patrolling all copy machines.... It helped the underground press tremendously."

SEED MONEY. Soros Foundation funding for students and professors at Hungarian universities also helped give rise to a group of young political activists who later went on to found one of Hungary's strongest new political parties--Fidesz. The foundation was the only institution in the country whose decisions were not tied to one's political affiliation or behavior. Moreover, it was run by a former enemy of the state. As a condition for providing seed money, Soros demanded that the foundation be run by Mikl s Vasarhelyi, a dissident who had been jailed for five years.

Soros' presence in Eastern Europe took on an added dimension in 1990, when he founded the Central European University (CEU). With campuses in both Prague and Budapest, it is in its third year of operation and has 400 students from 22 countries. Soros keeps a watchful eye on the university. Traveling without a chauffeur, secretary, staff, or bodyguard, he often hails his own cabs, walks across town, or takes the streetcar. His lifestyle in the West is more typical for a billionaire, with homes in London and New York and a sprawling house in Southampton, Long Island, where he frequently entertains guests from Eastern Europe and the field of economics.

Soros' presence in the former Soviet republics is growing steadily. In the Baltic states, his money is being applied to promote the growth of Western ideals--including free enterprise. In 1990, Soros organized an Open Estonia Foundation and similar foundations in Latvia and Lithuania, which provide business and management training, travel grants to scholars, scholarships, and English-language training. In Ukraine, Soros sponsors a Council of Advisers comprising Westerners posted to various government departments. One such adviser, Ukrainian-American venture capitalist George Yurchyshyn, was instrumental in establishing a Ukrainian central bank. On a national level, a Soros foundation is handing out grants to research scientists in the former Soviet Union, and it plans to stem a troublesome brain drain by giving scientists $100 million over the next two years.

Soros' crusade in support of liberal Western ideals has aroused spasmodic spurts of local hostility. He has been stung personally by the resurgence of nationalism in Hungary. Right-wing politicians, including former members of the ruling Hungarian Democratic Forum, attacked him bitterly in 1992, claiming he was part of an international conspiracy of Jews and others seeking to undermine Hungarian nationalism. He's also routinely accused of trying to profit from his philanthropic activities, although he sold his initial investment in the First Hungary Fund Ltd. to avoid any conflict between his investment and philanthropic activities.

VULTURE FUND. The Eastern European connection proved to have an unintended benefit for Soros, which is only now beginning to be reaped. Through his acquaintance with another Hungarian-born philanthropist, Albert Reichmann, Soros got to know Albert's brother Paul, the chieftain of the Olympia & York real estate barony. That "fortuitous" connection, as Soros puts it, resulted in a real estate partnership with Paul Reichmann that started in February. Quantum Realty Partners is, in industry parlance, a "vulture fund" aimed at gobbling up distressed properties. It's similar to the one that was organized by real estate magnate Samuel Zell. Hedge-fund manager Michael Steinhardt has also organized a vulture fund that, according to people familiar with the fund, has raised upwards of $300 million.

Real estate professionals are dubious of such ventures. "There's too many dollars chasing too few deals. The problem is that the insurance companies see the light at the end of the tunnel, and they aren't going to sell the properties in their inventories for a song," says the head of one national real estate investment firm who--the subject being Soros, after all--requested anonymity. Another real estate source notes that Soros is unlikely to be satisfied with the kind of annual returns that are prevalent in "bargain" real estate nowadays--8% a year. But Gladstein says that the Soros-Reichmann team is willing to be patient. "The market is depressed, and Paul Reichmann is a genius at picking properties that offer appreciation potential," he says.

Quantum Realty has not deployed any of its cash yet. But the Soros organization itself has done so. Last December, it snapped up a portfolio worth $350 million in commercial mortgages from the Resolution Trust Corp., and Reichmann and Soros are now zeroing in on a far more ambitious project--the mammoth Santa Fe development in Mexico City, which is one of the boldest schemes for urban development in the world. The $10 billion

project has attracted major Mexican and multinational corporations--and among them are Soros and his new partner.

It is a project worthy of the Reichmanns of yore. Soros maintains that "nothing has been finalized there." But sources in Mexico say the Soros-Reichmann group has agreed to commence a project consisting of as many as 10 office buildings containing shops and housing, for an investment that would be considerable by U.S. standards and that is downright huge by Latin American standards--somewhere between $500 million and $700 million. In addition, Soros and Reichmann are finalizing their plans for an office building and historic preservation project elsewhere in Mexico City. All told, the Mexican projects will be worth some $1.5 billion.

SIZZLING ISRAEL. A top adviser to the city's Santa Fe developers confirmed that the parties have signed a letter of understanding to buy approximately 23 acres of land in two different parts of the Santa Fe project. The definitive contract will be signed this month, sources say. The group will buy 10 acres in Santa Fe's City Center, an area of offices, restaurants, and stores. The Soros-Reichmann group also is buying 13 acres in another area called Cruz Manca. In this development alone, they will be building 3.5 million to 4 million square feet of office and upper-income residential space.

Soros is, he readily admits, a neophyte at real estate. His approach to investing is more apparent in one of his smallest and most recent acquisitions--the purchase of a stake in a small Israeli high-tech company, Indigo Ltd. The Israeli stock market had been sizzling--but Soros didn't buy into that. Instead, he bought a 12.5% stake in Indigo, a privately held company, for $50 million of his own funds. The company sells computer printers that combine the quality of offset printing with the ease of a laser copier, and it needed a cash infusion to pay for its planned worldwide marketing effort. First Boston advised Indigo to sell a stake in the company to investors through a private placement. "Soros took a quick look at the offering and told First Boston he wanted the whole deal," Indigo CEO Benny Landa recalls.

What followed were months of detailed studies on every aspect of the company. Soros' own experts and consultants from all over the world converged on the little Israeli town of Nes Tsiyona to analyze the technology and the market. "They even went to potential competitors to check out if we in fact had the tiger by the tail," jokes Landa.

MOST MEMORABLE. After tough negotiations, a deal was completed in June. Landa traveled to New York to meet with Soros, in what was to be the first of many meetings. The talk turned to a subject that Soros rarely dwells upon--his Jewish identity. An ardent Zionist, Landa tried hard "to bring Soros home." But Soros was unmoved. Says Landa: "Here I was explaining to him my outlook on Zionism and Judaism and he countered with the evils of nationalism and patriotism." Or as Soros told BUSINESS WEEK: "I don't discriminate against Jews--but I don't discriminate in favor of them either."

If the ghosts of the Holocaust still trouble George Soros, he would be the last to admit it. Some Jews may be troubled by Soros' lack of ethnic identity. But World War II turned Soros into

an internationalist. It is a credo that permeates all his writings.

Perhaps Soros put it best in his own words--in his 1991 book, Underwriting Democracy: "As I looked around for a worthy cause, I ran into difficulties. I did not belong to any special community.... I went to England in 1947 and then to the United States in 1956. But I never quite became an American."

But he did--in the formal sense, at least. George Soros became a naturalized American citizen in New York on Dec. 18, 1961, according to the Immigration & Naturalization Service. His Americanism, like his Judaism, is not something that Soros openly embraces. Today, nearly a half-century after the Holocaust, Soros cannot quite let go of the urge to conceal, because that is crucial to the survival ethic that has made him an enigma--and a world-class investor. In his life, as well as his work, George Soros is the quint-

essential contrarian.

      The following is a breakdown of the Quantum Fund as of Mar. 31, 1993.
                    Long positions     Short positions
                 Millions of dollars
      U.S.                 1,298.8        987.3
      EUROPE                 847.0        61.0
      ASIA                 1,221.1        --
      LATIN AMERICA           82.6        --
          STOCK INDEXES*
      U.S.                      --        1,064.2
      EUROPE                  35.4        --
      ASIA                   820.2        --
      U.S. GOV'T-RELATED   2,213.0        309.9
      U.S. OTHER             825.6        3.8
      EUROPE               6,397.4        --
      ASIA                   947.5        --
      LATIN AMERICA           70.1        --
      METALS                 127.9        --
       *Net dollar value of futures and options contracts