Soros's first fund was started while an employee of Arnhold & S. Bleichroeder, which I think his still his clearing firm today and a principle custodian of his family fund. He started it with $100,000 of the Firm's money and set up a model portfolio. Based on the performance of that model portfolio, he started another fund called the "First Eagle Fund" around 1968. In 1969 he started another fund called the "Double Eagle Fund" with 4 million capital. I think this was his first fund that he managed that could go both long and short and use leverage. An early "hedge fund" if you like. These early funds were quite successful. The Eagle funds attracted outside investors and grew in size. Soros left Bleichroeder in 1973 and set up his own hedge fund.
Soros has always been a person with high ethical standards. Soros has said that one of the factors in deciding to leave Bleichroeder was that the firm was recommending to clients stocks that they were also buying for their own accounts and this created a conflict of interest. These same conflicts of interest are still common place on Wall Street today. Soros solved the problem by leaving and starting his own hedge fund. He would then not be working for a Firm recommending buying or selling individual stocks in potential conflict with the fund he was managing.
He called his fund the "Soros fund" and this later became the "Quantum Fund". Some of the investors who were in the Double Eagle Fund a Bleichroeder elected to go with Soros. That enabled him to start his new fund with about 12 million.. He has said that very little of this money was his own. He and Jim Rogers, who he had known as an analyst at Bleichroeder, ran the early Soros Fund, essentially by themselves. Around 1978 the name was changed to Quantum Fund and Rogers left a few years later over disagreement about the need to hire additional help in managing the fund. In 1981 the Fund had a losing year , -22%, and I think that was the only losing year in the funds history. Even in 1987 when they had a very bad year, by Quantum fund standards, with major losses, the fund returned 14%.
All told, Soros' record of average annual return from the hedge funds he managed, starting with the Double Eagle Fund, was 35% by 1999. One thousand invested in 1969 would have grown, by 1999, to over 2.1 million had dividends been reinvested. At some point Soros hired Stanley Druckenmiller to manage the fund, but not before he and Jim Rogers, in the earlier years, had achieved a phenomenal ROI record.
Eventually the fund became so large that as Soros puts it, it out outgrew its environment. There was no choice but to expand into other areas of investment. In 1995 Soros said that the fund could not possibly repeat the performance of the fund's first quarter century. If it did, it would end up owning all the shares in the world. He has said that he would be happy with a performance half as good in the next quarter century.
The probability of this record being achieved by luck alone, while not zero, is tiny. (See Malkiel's "A Random Walk down Wall Street", and Taleb's "Fooled by Randomness.) Soros' record thoroughly discredits Malkiel's thesis. Soros has said either he is wrong or the efficient markets hypothesis is wrong. I think I know which is wrong!
Have a happy Fourth of July.
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