The billionaire investor who beat the Bank of England on Black Wednesday in 1992 and drove the UK out of the European Exchange Rate Mechanism has given a rare glimpse of the emotional cost of the hedge fund industry as he announced plans to wind up his business.
Stanley Druckenmiller, the inspiration behind George Soros’ famous bet against the pound in 1992, surprised investors by promising to close Duquesne Capital. In a letter to clients, he blamed the impact of three decades in the world of high-stakes finance, and the pain of losing money.
“While the joy of winning for clients is immense, for me the disappointment of each interim drawdown over the years has taken a cumulative toll that I cannot continue to sustain,” Druckenmiller wrote, who has an estimated fortune of US$3.5 billion.
“I continue to care deeply about performing for our clients, and the stress of performing in a way that I consider to be disappointing — even if you do not share that view — persists in exacting a high emotional toll, with the result that I have concluded that this change is necessary,” he added.
Kenneth Heinz, president of Hedge Fund Research, said that Druckenmiller’s decision shows the personal capital that he and his fellow traders invest in their businesses.
“There’s no question that fund managers and people who have been in this industry a long time are under great pressure to be successful, not only financially but also personally,” Heinz said.
This has been a tough year for macro hedge funds, such as Duquesne Capital, whose trades are based on changes in the global economy. Duquesne is thought to have lost about 5 percent so far this year, but many rivals appear to be performing worse. Data collected last week by the Financial Times showed several big names are sitting on significant losses for the year so far, some losing up to 10 percent of their assets.
An invitation to play in a golf tournament this October helped to persuade Druckenmiller to step down. He rejected the opportunity, fearing it would coincide with another bout of market turmoil.
Several other hedge funds have closed this year, and Druckenmiller’s departure suggests the industry is experiencing a major shake-out. Heinz, though, is confident that hedge funds will not suffer a talent shortage.
“Even the most successful hedge fund executive reaches a point in their lives when they want to step back from managing capital and do something else, but for every one there are many more people who want to come in and be as successful as Druckenmiller,” he said.
Druckenmiller founded Duquesne Capital in 1981, and it holds about US$12 billion in assets. He is married with three daughters, and was ranked as the 91st richest American by Forbes this year. Last year he gave US$705 million to a foundation that supports education, medical research and anti-poverty charities, thought to be the biggest single charitable donation by an American last year.
Druckenmiller was chief investment officer for Soros Fund Management on Sept. 16, 1992, when it took a huge position against the pound, winning more than US$1 billion. This dragged Soros into the limelight, but Druckenmiller should have got the credit a another Soros employee, Scott Bessent said.
“What is so interesting to me was the combination of Stan Druckenmiller’s gamesmanship — Stan really understands risk/reward — and George’s ability to size trades,” Bessent wrote in a book titled Inside the House of Money.
“Make no mistake about it, shorting the pound was Stan Druckenmiller’s idea. Soros’ contribution was pushing him to take a gigantic position,” he added.
The history of Black Wednesday
UK interest rates were raised from 10 percent to 15 percent on Black Wednesday (Sept. 16, 1992) in a failed attempt to keep the pound sterling in the European Exchange Rate Mechanism (ERM) — a forerunner of the eurozone.
David Buik, of BGC Partners, was a money trader in 1992, and remembers seeing then-UK chancellor of the exchequer Norman Lamont, “with sweat all over his brow and upper lip” as he announced that Britain would leave the ERM.
“It was a horrific day because we had never seen such seismic movements in interest rates and yields on a single day before,” Buik said.
The ERM debacle cost Britain about £3.3 billion (US$5.1 billion), but falling out of it allowed interest rates to halve over the next year to end the early 1990s recession. Lamont was sacked the following May, but the episode did not sink the career of his young political adviser, now British Prime Minister David Cameron.
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