Investing In Soros's Protégé?

Katherine Burton of Bloomberg reports, Scott Bessent to Start His Own Hedge Fund With $2 Billion From Soros:

Scott Bessent, who’s been overseeing George Soros’s $30 billion fortune for the last four years, will leave at the end of 2015 to start his own hedge-fund firm.

Bessent, 52, is forming Key Square Group with a $2 billion investment from Soros, according to a memo sent to employees of Soros Fund Management. That will make his firm one of the largest hedge-fund start-ups ever, even before he begins raising money from other investors.

“Over the past four years, Scott has managed the firm’s assets with skill and dedication,” said Robert Soros, George’s son, in the memo. “He has decided to start his own venture because of the constraints involved in working with a family office structure, which prevent him from raising outside capital.”

Bessent has spent much of his career managing money for Soros, overseeing his European investments for about eight years in the 1990s, and returning to the firm in late 2011. Since then, the family office has made about $10 billion in profit under Bessent as investment chief, or about 13 percent annualized, according to a person familiar with the firm who asked not to be named because it’s private.

Bessent will continue to advise the family office and remains close to Soros and his family, the memo said. After he leaves, the investment strategy and asset allocation will be managed by the existing committees that Robert Soros and Bessent put in place.

Chanos, Druckenmiller

After graduating from Yale University in 1984, Bessent did stints at Brown Brothers Harriman & Co., Saudi Arabian holding company Olayan Group and Jim Chanos’s Kynikos Associates before taking a job as an analyst for Soros’s hedge fund. Soon after, he became the fund’s London-based portfolio manager, as Soros fired the European team that had been struggling to make money.

In 2000, Bessent decided to strike out on his own after Soros announced he was cutting risk and two of his lieutenants, Stan Druckenmiller and Nick Roditi, left the firm. He raised $1 billion for Bessent Capital Management, which ran a global and a European stock fund. At the time, about $150 million came from Soros.

Bessent was in the process of forming a macro fund when he was recruited by Soros’s family office in September 2011. His new fund will also try to profit from macroeconomic trends.

Bessent didn’t return a call seeking a comment.

Jack Meyer, the former head of Harvard University’s endowment, holds the record for the largest hedge-fund startup when he opened Convexity Capital Management with more than $6 billion in 2006. Druckenmiller’s former colleagues at Duquesne Capital Management opened their PointState Capital with $5 billion in 2011.

Geregory Zuckerman and Rob Copeland of the Wall Street Journal also report, Soros’s Investment Chief to Depart:

Another top investor at George Soros’s firm is leaving.

The billionaire’s Soros Fund Management LLC on Tuesday said that Chief Investment Officer Scott Bessent would exit at the end of this year to start his own hedge-fund firm. Mr. Bessent will be the fifth chief investment officer to depart since April 2000, when Stanley Druckenmiller quit to run his own firm.

The firm didn’t name a successor to Mr. Bessent and it wasn’t clear if a new chief investment officer would be chosen. For now, the firm’s investment committee will run the firm.

Running Mr. Soros’s firm is by any measure a plum job. It invests $30 billion on behalf of Mr. Soros, his family and his foundation in stocks, bonds, currencies and commodities around the world. It has 100 investment professionals and joins with other firms on investment and private-equity deals.

But in the past, some of the chief investment officers working for Mr. Soros, who is turning 85 years old next week, bristled at how he sometimes inserted himself in the firm’s operations, usually after the firm suffered losses or underperformed, people familiar with the matter said.

Mr. Bessent’s departure comes as the firm has scored gains of about 8% this year, thanks in large part to big bets on the U.S. dollar and bullish wagers on European and Japanese stock markets, according to people close to the matter. By contrast, the MSCI World Index is up 2.9%.

Mr. Bessent said in an interview that he has a good relationship with Mr. Soros but wanted to start his own firm. The Soros organization will invest $2 billion in Mr. Bessent’s Key Square Group, according to a memo reviewed by The Wall Street Journal, giving the fledgling firm a big boost. His plans were earlier reported Tuesday by Bloomberg News.

“I’ve had an intense and rewarding four years with George,” Mr. Bessent said in the interview. “He’s been a great coach, and I have a solid relationship with him and his family. I want to manage their money for a long time.”

Mr. Soros, a supporter of liberal causes and among the most successful investors of the past century, gained fame for his bet against the British pound in 1992, a trade that was the brainchild of Mr. Druckenmiller and ultimately netted more than $1 billion. Mr. Soros also made billions of dollars anticipating the global financial crisis that hit in 2008.

But about half of the firm’s assets in recent years have been invested in other hedge funds and investment firms. Last year, Mr. Bessent traveled to Newport Beach, Calif., to meet Bill Gross, the bond investor who just started a fund for Janus Capital Group Inc. after quitting the bond powerhouse he had helped start, Pacific Investment Management Co.

Eventually, the Soros firm invested $500 million in Mr. Gross’s new fund, an investment that has had mixed results.

The Soros firm still makes its share of bets in the market, however. Late last year, Mr. Bessent shifted money out of U.S. investments into Japan and Europe. The firm has largely clung to this position, which has paid off, with the view that lower interest rates abroad, and higher rates at some point in the U.S., will continue to help the dollar and boost European and Japanese stock markets, according to people close to the matter.

Lastly, Stephen Foley of the Financial Times reports, Scott Bessent quits Soros group to launch hedge fund:

Scott Bessent, chief investment officer of George Soros’s $30bn family office, is setting up on his own, in what will be one of the biggest ever launches of a new hedge fund.

Mr Bessent will open his new firm, Key Square Group, with an initial $2bn allocation from Mr Soros.

The move, which will happen at the end of this year, was announced on Tuesday in a memo to the about 300 staff at Soros Fund Management (SFM), which oversees the billionaire investor’s fortune.

In the memo, seen by the Financial Times, Mr Soros’s son, Robert, who is the deputy chairman of the family office, explained why Mr Bessent was leaving.

“Over the past four years, Scott has managed the firm’s assets with skill and dedication. He has decided to start his own venture because of the constraints involved in working within a family office structure, which prevent him from raising outside capital.”

Mr Bessent was lured back to join Mr Soros in 2011 after having run his own fund for a decade.

He had been an analyst and investment manager for Mr Soros in the 1990s, including in 1992 when he was in London at the time of the famous decision to bet against the British pound. That trade, which forced the UK out of the European exchange rate mechanism, earned Mr Soros $1bn and the moniker “the man who broke the Bank of England”.

SFM gave Mr Bessent the title chief investment officer in order to lure him back, and is not immediately planning to replace him in the role.

The firm’s investment strategy and asset allocation will be managed by two existing committees, which already play an active role in both processes, according to the memo.

In 2011, Mr Soros became one of a number of veteran hedge fund managers who have returned outside money to their investors and carried on instead as family offices, managing only their own fortunes. Family offices have fewer of the regulatory burdens, including disclosure and compliance requirements, that have grown up since the financial crisis.

Key Square is named after a critical position for a player’s king during the endgame in chess. Mr Bessent’s departure was first reported by Bloomberg.

I don't agree with all his political views, especially in regard to Russia and the Ukraine, but George Soros is the undisputed king of hedge funds and hiring talent like Scott Bessent, Stan Druckenmiller and Nick Roditi is a huge reason behind his long-term success.

As for Bessent, nothing like being coached by the world's most famous hedge fund manager and then receiving a $2 billion allocation from him to launch his own fund. In his memo, Robert Soros stated that Bessent "decided to start his own venture because of the constraints involved in working within a family office structure, which prevent him from raising outside capital.”

Mr. Bessent is not going to have any problem raising a huge sum of money from large endowments, global pensions and sovereign wealth funds. His track record and experience speak for themselves. Having Soros Fund Management as an anchor/ seed investor is the cherry on top to seal any deal.

His biggest problem will be managing expectations. After the initial hoopla, investors will want to see if Bessent can continue delivering exceptional results managing his own fund. And managing his own fund will present a ton of headaches and other institutional constraints he didn't have to deal with while managing Soros's family office investments.

Of course, Bessent knows all this. He has already managed his own fund but the landscape for hedge funds has drastically changed in the last few years. The institutionalization of hedge funds is placing a lot more emphasis on compliance and alignment of interests, lowering the fees that large hedge funds were once able to easily command.

Still, if Bessent raises billions more on top of Soros's initial $2 billion seed investment, and manages to keep up his stellar performance, he too will become a multi-billionaire overnight and enjoy the same success as his mentor, Druckenmiller, Dalio, Howard, Tudor Jones and other global macro "gods".

That all remains to be seen. As a rule of thumb, I generally don't get overly excited about anyone starting a hedge fund, especially in these brutal markets. It's one thing working as a CIO for Soros Fund Management and another going off on your own and dealing with managing a business and all the crap that goes along with it.

One thing I always loved about Soros is he ran a true global macro fund, investing in currencies, bonds, stocks and commodities. When I was investing in directional  hedge funds at the Caisse (CTAs, L/S Equity, global macro and funds of funds), it always struck me as odd that most global macro funds were investing only in fixed income and currencies, ignoring stocks and commodities.

What will happen to Soros Fund Management now? I don't believe in committees overseeing investments. I will give George and Robert Soros my unsolicited advice. Go out and try to recruit the former CIO of Ontario Teachers', Neil Petroff, out of retirement. He may not have the 'hedge fund pedigree' that is typical for these coveted jobs but he will offer you so much more that other wealthy family offices can only dream of. I'm dead serious about that recommendation.

As for Mr. Soros, I wish him a happy 85th birthday and many more years of health, happiness and being active. Below, I embedded an older (October, 2008) fascinating conversation with George Soros and professor Richard Caballero at the Massachusetts Institute of Technology on Soros's last book, The New Paradigm for Financial Markets. If you've never read it or Soros's classic book, The Alchemy of Finance, make sure you do so. They will open your mind to another level of thinking about markets.

I always dreamed of having a dinner with George Soros, not to talk about alpha, beta and beyond or Russia and Ukraine, but to discuss Karl Popper, Isaiah Berlin, Michael Waltzer, John Rawls, and Charles Taylor. I highly recommend you read Taylor's Malaise of Modernity and especially Sources of the Self, which remains the best book on political philosophy I've ever read (I devoured it back in my good old McGill days when I was auditing Taylor's courses for pure intellectual stimulation which I desperately needed majoring in Economics and minoring in Mathematics while taking health science courses thinking of becoming a doctor which unfortunately never panned out).

Also, Credit Suisse Global Head of Capital Services Bob Leonard discusses the results from Credit Suisse's Mid-Year Hedge Fund Investor Sentiment Survey. He speaks with Stephanie Ruhle and Erik Schatzker on Bloomberg Television's “Market Makers.” It is best to view this clip here as embedding Bloomberg clips in a blog is a nightmare (they need to change their embed code to make it better).