Thursday, August 19, 2010

Hedge Fund Icon Stanley Druckenmiller's Surprise Retirement

Yesterday came a surprise announcement in the hedge fund world.  One of the top dogs of this era, Stanley Druckenmiller, decided it was time to end a magnificent run of some 30 years.  With the big hedge funds getting even bigger [Mar 8, 2010: List of Largest Global Hedge Funds] the question now being asked is, can these giants truly outperform anymore?  [Mar 29, 2010: Are John Paulson's Hedge Funds Now too Big to Outperform?]  It appears Druckenmiller, after leaving Soros a decade ago since that amount of capital managed became too large, has run into the same problem in his current fund.

To be honest, I have not followed Druckenmiller that closely, as I do some hedge fund mavens but after reading this Bloomberg piece on him (along with the letter he sent to investors), I sure wish I had.  His track record is astounding, and unlike the Peter Lynch's (mutual fund) or Michael Steinhardt's (hedge fund) the second half of his career has been in a much tougher era, with twin 'once in a lifetime' bear markets, whereas those who managed only in the 80s and 90s had the wind at their back almost the entire time.   But aside from the performance, many many things in this story spoke to me- his competitiveness, we both spent time in the Economics department at Univ of Michigan, his use of technical analysis, the toll money management takes if you truly want to be the best i.e. lack of vacations or ever really being 'away' from the market, and some of his views on what is happening in the economy and our misallocation of talent in our country due to emphasis on high finance (views espoused in these very same web pages).  For someone who has been working his tail off since 2007 (taking about 6" vacation days" in that time) the story about not being able to go play golf in Scotland even for a few days in October (despite being a billionaire) hit home.   Fascinating to know he was using technical analysis as part of his toolkit in the 80s, before it was popular.  And to not have a losing year once in 30?  Almost impossible to comprehend.  Certainly seems like a person you'd like to sit down with for an hour and just hear him speak.

Some excerpts via Bloomberg:
  • 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.
  • 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.
  • 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. 
  • 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.
  • “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.
  • 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.” 

Anecdotal story that drove the decision:
  • 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.
  • 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.
  • “I plan on managing a decent chunk of my money, but only an amount that will be fun,” he said.  

Some economic thoughts:
  • 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’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’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.
    • 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.
    • 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.  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.” (agree!)
    • Druckenmiller..... 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.  (I've written that verbatim in multiple posts!)  “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.”

    The rest of the piece has some history on how he got into money management (his hedge fund was started with $75,000 loaned to him!), some of his most famous trades such as breaking the Bank of England along with Soros, as well as some interesting background on his philanthropy.

    Embeded below is his letter - hit fullscreen for easier reading:

    Druckenmiller August 2010 Letter to Investors                                                            

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