Wednesday, July 27, 2011

Don't Believe Everything You Read


Last week the media was full of reports that several large hedge fund managers - including George Soros, one of the most successful hedge fund managers of our generation - were holding large amounts of cash in their portfolios due to the current market environment.

Here was a typical story from Bloomberg, dated July 19, 2011:

Keith Anderson, who runs the $25.5 billion Quantum Endowment Fund for Soros Fund Management LLC, has seen enough of choppy global markets.

In mid-June, Anderson told his portfolio managers to pull back on trades as the hedge fund’s losses hit 6 percent for the year, according to two people familiar with the New York-based firm. As a result, the fund is about 75 percent in cash as it waits for better opportunities, said the people, who asked not to be identified because the firm is private.

http://www.bloomberg.com/news/2011-07-19/soros-quantum-holding-75-cash-leads-hedge-funds-baffled-by-global-crises.html

Well, not so fast. Turns out that Soros is actually closing his fund to anyone other than his family, and so much of the cash could have been raised in anticipation of returning funds to his outside investors, and that Soros is trying to cut back on his investing activities.

Here's an excerpt from yesterday's New York Times:

George Soros, the investor who broke the Bank of England and came to represent the swashbuckling style of hedge fund managers and then their entry into the world of global affairs, has decided to return money to outside investors in his Quantum fund.

Mr. Soros, who will turn 81 next month, is the latest hedge fund magnate to forgo managing the money of outsiders in favor of his own, though his move is more symbolic. Of the roughly $26 billion the fund manages, less than $1 billion belongs to outside investors.

http://dealbook.nytimes.com/2011/07/26/soros-to-close-fund-to-outsiders/?scp=2&sq=george%20soros&st=Search

And, oh, Mr. Anderson is also leaving the Soros company.

Now, it could very well be that Soros really does have three-quarters of his assets in cash due to market considerations. However, it could also be that the closing of his fund to outsiders may also mean that Soros is really winding down much of his investing activities, so the cash balance is really not a market call at all. Or it could be that the cash positions are collateral for some futures or foreign exchange trades that Soros is doing.

As outsiders, we really don't know, and that's my point.

Hedge fund are notoriously secretive, and to base one's market calls on reported positions is not a particularly good way to develop an investment strategy. George Soros did not become fabulously wealthy by letting others in on his trades, and I doubt he is starting now.

And then there's the Buffett effect. Often a news report that Warren Buffett has taken a position in a particular stock, which inevitably leads to a jump in its share price. Then it later turns out that the rumor is either wrong, or that someone other than Buffett at Berkshire has made the share purchase.

As the old axiom goes, don't believe everything you read.