One Up On Soros?
Scott Bessent, who oversaw George Soros’s $30 billion fortune for the last four years, will be managing $4.5 billion by the end of the first quarter, one of the largest hedge fund startups ever.I've already covered investing in Soros's protégé and definitely think Scott Bessent has the pedigree and skills to become a great global macro hedge fund manager. However, I tempered my enthusiasm and think this is a brutal, BRUTAL, environment to start any hedge fund:
Bessent, 53, began trading $2 billion from his former employer this week at Key Square Group, a macro fund that chases economic trends by trading stocks, bonds, currencies and commodities. The firm, which capped initial assets at $4.5 billion, raised most of the balance from fewer than 10 institutions and had to turn away some money, according to people with knowledge of the firm.
Bessent’s success in attracting money shows investors are willing to take a chance on managers with strong pedigrees and track records, even after several multi-billion-dollar macro funds, including ones run by Fortress Investment Group Inc. and Bain Capital, closed last year, primarily because of wrong-way currency trades. Chris Rokos, a former star trader at Brevan Howard Asset Management, raised more than $1 billion for his London-based firm that opened in October.
Key Square started with about 15 employees, according to one of the people, including nine from Soros Fund Management and three non-research professionals from Fortress’s macro fund. The investment professionals with ties to Soros include Michael Germino, Francis Browne, Greg Pappajohn, Charles Galbreath, John Roque and Bill Callanan, said the people. Bessent declined to comment for this story.
Bessent spent much of his career at Soros’s hedge fund. After graduating from Yale University in 1984, he 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 in the early 1990s.
Returns to Soros
Soon after, he became the firm’s London-based portfolio manager as Soros fired his European team that had been struggling to make money. Bessent oversaw European investments for about eight years.
In 2000, he decided to strike out on his own after two of Soros’s lieutenants, Stan Druckenmiller and Nick Roditi, left the firm and the billionaire said he was cutting risk. He raised $1 billion for Bessent Capital Management -- including about $150 million from Soros -- and ran a global and European stock fund.
Bessent was in the process of starting a firm to make macro wagers when Soros asked him to return in September 2011 to be the chief investment officer. Under Bessent’s tenure as CIO, the family office has made about $10 billion in profit, or about 13 percent annualized.
Jack Meyer, the former head of Harvard University’s endowment, holds the startup record with his Convexity Capital Management, which opened with more than $6 billion in 2006. Druckenmiller’s former colleagues at Duquesne Capital Management started PointState Capital with $5 billion in 2011.
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.When it comes to his fortune, George Soros doesn't mess around, he is merciless and will quickly pull the plug if he's not happy with his external managers' returns. If you don't believe me, just ask Bill Gross and Bill Ackman. These star managers both got the Soros sword and given their performance in 2015, especially Ackman who was down a whopping 21% last year, I'd say the undisputed king of hedge funds made the right call to pull out of his fund, ignoring all the hoopla on hot hedge funds.
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.
Scott Bessent knows his mentor's ruthless penchant for investment excellence and will undoubtedly feel the heat if his fund doesn't perform well. The other thing he knows is that success is critical in the first three years of the fund, because if he performs well during this time, assets under management will mushroom and he too will become an over-glorified hedge fund "guru" collecting a 2% management fee on multibillions and party it up like the rest of the hedge fund hotshots no matter how well or poorly he performs.
[Note to the naive masses: If you want to understand rising inequality, look no further to the financialization of modern economies and how big hedge funds and private equity funds manage to gather billions in assets and then charge insane fees no matter how well or poorly they perform. It's beyond outrageous, it's the biggest financial scam of our era!]
Interestingly, I'd love to know who the other investors in Key Square are and if they include other well-known hedge fund gurus, big funds of funds (like Blackstone) or a few large public pension and sovereign wealth funds (Ontario Teachers, CPPIB, the Caisse, New Holland Capital might have gotten an allocation but I'm merely speculating and to be honest, not sure they would rush to seed any fund no matter how famous the manager is).
Apart from Key Square, the other huge global macro startup I've got my eye on is Rokos Capital Management run by Chris Rokos, the former star trader at Brevan Howard. Like Soros, Alan Howard who Rokos co-founded Brevan Howard with, is equally ruthless when it comes to investment success.
Brevan Howard has struggled to deliver stellar returns ever since Chris Rokos left in 2012. Its assets reportedly lost 11% of their value in nine months as markets were plagued by fears about the Chinese economy and dramatic currency fluctuations. Still, it's considered a great global macro fund and despite a tough year for the fund’s trading strategies, which has resulted in job cuts in recent months, the firm delivered a big pay rise for its London traders and other members, with the overall sum paid out passing £120m.
Rokos was embroiled in a bitter legal dispute with Alan Howard but that was settled last January and he got regulatory clearance to start his new macro fund in late September. Rokos then capped his fund at one billion dollars AUM:
The new macro hedge fund launched earlier this year by Brevan Howard co-founder Chris Rokos has reportedly already attracted more than $1 billion in assets.There's no doubt about it, Chris Rokos is a star macro trader and he too has tremendous potential to gather huge assets if his fund performs well in the next three years. Rokos is already among the richest Greeks in the UK, a list which includes big time shipowners, and if his fund performs well, he will become a lot richer (once that 2% management fee kicks in on multibillions, it's smooth sailing but he has to perform well over the next three years to see his assets under management and net worth explode up).
The capital comes less than a month after Rokos Capital Management received approval from financial regulators in the United Kingdom.
Approximately half the capital is from outside investors, according to a Bloomberg article citing two unidentified people familiar with the situation. The rest is internal money belonging to the famed investment manager, whose net worth is estimated to be close to $1 billion, and his partners. Rokos hopes to eventually raise $3 billion for the new fund, the article noted.
Rokos left Brevan Howard in 2012 after making a reported $4 billion for Brevan’s fund between 2004 to 2012. He co-founded Brevan with Alan Howard in 2002, and reached a settlement earlier this year that voided an agreement with his former company that would have prevented him from managing external money until 2018.
Rokos has been on a hiring spree this year as he geared up to launch the new fund, hiring more than fifty employees and bringing former Nomura chief European economist Jacques Cailloux, former Goldman Sachs Asia Pacific macro head Stuart Riley, and former Brevan Howard colleague Borislav Vladimirov aboard as senior executives.
Based in London, Rokos Capital Management’s initial fund will trade on broad macroeconomic themes, taking positions across asset classes including stocks, bonds and currencies.
[Note: I got a buddy of mine who is a 48 year old Greek-Canadian star currency trader in Toronto looking to launch his currency hedge fund and I think he can give Rokos and Bessent a run for their money!!]
Anyways, Bessent and Rokos have launched their respective funds and now the real hard work begins. Will they be the next generation of macro gods and have one up on Soros? That all remains to be seen, especially since they decided to launch their funds at a time when the deflation tsunami is about to hit us.
I wish them and a lot of other macro funds the best of luck in this brutal environment. I suggest they all carefully read my Outlook 2016 and keep shorting emerging market stocks, bonds and currencies, oil futures, the CAD, Aussie and Kiwi, energy and commodity stocks and the euro (King Dollar will break parity shortly and that's when the fun begins).
What else? Get ready for another Big Bang out of China, which will add more deflationary misery to this wretched world economy where secular stagnation reigns.
And if Bessent, Rokos and others make oodles of money on my calls, they can join Canada's top pensions and throw me a bone by subscribing or donating to my blog at the top right-hand side under my picture.
As for George Soros, he didn't take my advice and hire Neil Petroff, Ontario Teachers' former CIO who retired in June of last year, as the next CIO of Soros Fund Management. Instead, he just named Ted Burdick to the position, someone who has been associated with him for more than 15 years and who sits on the investment committee. It's alright, Neil Petroff joined Northwater Capital in Toronto where he is the Vice Chair (great move for him and Northwater and a lot less stress!).
Below, Allianz Chief Economic Advisor Mohamed El-Erian, shares his Fed forecast and says fundamentals are pushing the markets down, but liquidity is not there to push it back up.
As I stated in my Outlook 2016, the Fed is making a grave mistake raising rates when the rest of the world is struggling with deflation. If it continues on this path, it will ignite another crisis in emerging markets which will all but ensure global deflation.
Having said this, there is plenty of liquidity to drive risks assets higher, so don't throw in the towel just yet but make sure you pick your spots carefully or risk having another year where nothing works.
One last note to Mr. Soros, pick up a copy of Charles Taylor's Philosophical Arguments. I just received a signed copy over the holidays from my mother and stepfather in London where Taylor recently gave a lecture on Democracy, Diversity, Religion at LSE, Soros's alma mater.
I embedded the lecture below. You will see why even if deflation ravages the Canadian economy, we still have the world's most brilliant political philosopher and in my opinion, Canada's greatest treasure.
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