Who is manipulating Australia's currency to near-record lows? David Elias reports.
THERE are no rules to the game, no hidden agendas, no evil intent. Americans George Soros, Julian Robertson and Paul Tudor Jones lead the international financial wolf pack, but there are hundreds more like them driven by the one imperative: make as much money as you can. Every form of publicly traded security in every market in this increasingly globalised economy is fair game by any tactic, fair or foul, as long as it is legal. The battered Australian dollar, sliding to 58 cents this week against the American dollar, has been in their sights. Their vehicles are hedge funds, the exclusive investment clubs for the wealthy that are thriving in America. Privately run and never advertised to the public, these funds are free of security exchange controls and at liberty to operate in any publicly traded commodity anywhere in the world. They have multi-billion-dollar assets leveraged to 20 times their value, so they can overwhelm currencies and sharemarkets. They play futures, sell short, force down the values of stocks and dollars, then exit with profits that give investors extraordinarily high returns.
The operators live in a world of adrenaline and big commissions that lends itself to eccentricity. Soros, the architect of the baffling theory of reflexivity, gives away $US360 million a year - about half of his income - to causes dedicated to building an open society in developing and post-communist countries. Robertson has only once got angry enough to sue the media. He didn't mind the prestigious Wall Street magazine BusinessWeek calling him bald, burly and bad-tempered, but when his annual income dipped to $US300 million and it suggested his glory days were over he exploded. His lawyers forced a rare retraction that carried figures of his return on investments - 48 per cent before fees in 1996 and 67 per cent in 1997 - far exceeding market averages of other leading hedge funds. Tudor Jones, in comparison, is just an ordinary rich kid with a 1200-hectare private hunting reserve in Maryland and a home full of computer screens to track the world's markets. His quirky sense of humor, however, extends to the creation of The Robin Hood Foundation for the poor.
As the Australian dollar tumbled this week through the 60-cent barrier and down past 59 cents, tired operators in currency dealing rooms hedged their own bets. Yes, there was no doubt the hedge funds were doing a job on the dollar. But it was all rumor, so who was prepared to put names to the sellers forcing down the price? With nobody in Wall Street admitting anything, why did they suspect it was the hedge funds? "Only the hedge funds and central banks have the financial muscle to move currencies around like this," said Mark Tierney, foreign exchange strategist with BT Australia. "We can be confident the central banks are not doing it, so it all comes down to the hedge funds as the organisations with sufficient clout to take on the Aussie dollar." Brent Aggar, Macquarie Bank associate director, stepped a bit closer. He wouldn't name Soros, but on Monday he told the ABC: "I think it is one particular aggressive hedge fund who has, I believe, a disastrous position in Indonesia ... and the only way to get US dollars out of the region is to sell something that has actually got plenty of liquidity. That, unfortunately, is the Aussie dollar."
Alan Oster, chief economist with the National Bank, jumped right in. "Soros, Tudor Jones and Alan Robertson. I am sure. They are taking a position on what they think is the fundamental position of the dollar and they are trying to drive it down further. Soros and Tudor Jones have got about $8 billion or $9 billion. They started selling the dollar short at 62 cents. It is now 59 cents, and they are pushing it further. They will make three or four cents off the back of every dollar when they have to buy back in to settle in three months' time."
By his reckoning that could give them a $360 million profit on a week's work, as long as there are no unforeseen disasters. There may also be a bit of cream on top of the jam. Oster says he has detected the hedge funds operating in the interest-rate and futures markets as well. He suspects a coterie of 30 to 40 smaller funds. Hedge funds are an American creation designed by New York trader Alfred W. Jones in 1949 to serve the wealthy end of the US investment community. They are the piggy banks of millionaires, trust funds and endowments. While there is some European, Middle Eastern and Asian money in them - usually in the offshore variety registered in tax havens - they have failed to attract investors outside the US. They are private investment partnerships with none of the controls of mutual funds that are open to public investment. As long as a fund has a minimum of 65 accredited investors and does not sign up more than 99 members, the US Securities Exchange Control gives it a free rein to trade wherever and in whatever it chooses. And they choose usually to leverage their funds in multiples of up to 20 or even 30 times their asset value, then shoot for the stars. It is big-league, high-risk punting on futures and derivatives and, if the investors loose their shirts or blouses, that's tough luck. There's no comeback. The attraction is the potential to get a return of up to 70 per cent a year, but that depends on the ambitions and skills of the general partner - the operator who runs the fund on a commission of 20 per cent of the profits and a fixed management fee of 1-2 per cent of the assets under management. It's incentive enough to do well. The general partner usually insists that investors have a net worth of at least $1 million, and a six-figure annual income. The partner looks for a minimum stake of between $250,000 and $500,000, so the fund has between $25 million and $50 million that it can leverage up to $500 million or $1 billion. Hedge funds cannot be advertised, so investors must find their own The limitations on numbers gives operators with high reputations like Soros, Tudor Jones and Robertson the potential to run multiple funds with enormous financial clout. Hedge funds took off in the early 1980s when their number started to grow from under 100 into thousands. Estimates of the present number of funds varies. America's Institute of Certified Financial Planners says there are more than 3000 funds. George Van, chairman of Van Hedge Fund Advisers in Nashville, says there are 4700 funds managing about $225 billion of investors' capital. Leveraged by 20 times, that would give them a financial clout of $4500 billion. That's more than enough to short sell far bigger economies than Australia's, as last year's Asian financial crisis has demonstrated. Hedge funds, led by Soros's Quantum group and Julian Robertson's Tiger Management, moved on the Asian currencies last May, beginning with the short selling of the Thai baht. They pursued the currency relentlessly until the baht plunged 18 per cent overnight to a record low against the dollar. The Philippine and Malaysian Governments had to take defensive actions to protect their currencies. It was the beginning of the Asian financial crisis and Malaysian Prime Minister, Mahathir Mohamad, attacked Soros, describing him as a menace and a moron. Until then Soros had been best known for his assault on the British pound. He pooled the resources of four Netherlands Antilles domiciled funds to move on the pound in September 1992, selling short in much the same way that the hedge funds are working over the Aussie dollar. Soros staked $22 billion short selling the currency and in a week he had made a profit of $1 billion. He had so undermined the currency the UK had to pull out of the European monetary system. Soros, 69, has since been known as the man who broke the Bank of England, and he revels in it.
Born in Budapest, he is an extroverted survivor of the Holocaust and refugee from post-war Eastern European communism. As a student at the London School of Economics in the early 1950s he took an interest in the work of philosopher Karl Popper, who he says had a profound influence on his thinking and later philanthropic activities. Soros craves publicity, especially for his open society philosophy, the network of foundations in 31 countries that he funds and his calls for change in the financial system that has served him so well. Earlier this year he told the World Economic Forum that the international financial markets were inherently unstable and called for a rethink of the market system. He made special mention of the dangers of derivatives from which he has divined most of the $10 billion-plus assets in the Quantum group. Soros and his less flamboyant lieutenant, Stan Druckenmiller, are operating through derivatives to moving funds and shake currencies, but, as now, Soros says nothing publicly, leaving the market to react to rumors that more than likely leaked from his office. Then having used stealth to make money out of a flaw in a country's economic fundamentals he is just as likely to be first in with a headline-grabbing rescue package. This year Soros, in a show of support for Thailand's recovery, joined a foreign consortium that invested $US650 million ($A971 million) in a steel mill. Soros began amassing his fortune through international investment in the US in the late 1950s and early 1960s. By 1990 he was on top of the Wall Street pile, its highest earner for four consecutive years, setting records of $US650 million ($A936 million) in 1993 and $US1.1 billion in 1994. Second place in 1993 went to Julian Robertson, 66, who earned $500 million from his Tiger and Jaguar funds. He took second place again in 1995 with a mere $300 million which led to the BusinessWeek story on "The Fall of the Wizard" that so irritated him.
Robertson turned himself into a high-flyer in 1980 after 20 years of obscurity as a stockbroker and money-manager. He was the son of a North Carolina textiles industry executive who took his local university degree in business administration to New York and got a job as a sales trainee. Tiger's strength has always been the share markets, but that has not stopped Robertson entering the currency market as a macro player on nearly equal terms to Soros. He has said that the currencies of Asia and the South Pacific intrigue him, especially those of Thailand, Singapore and New Zealand. Since Robertson went into the hedge-fund industry in 1980 he has turned his investors' stake of $8 million into more than $7 billion.
Tudor Jones is a comparative Johnny-come-lately; a 43-year-old economics graduate from Memphis, Tennessee, who likes to hunt, fish and ski. He is the founder and president of Tudor Investment Corporation and has been earning up to $100 million a year since 1988, having made one of his best breaks during the October 1987 crash. He made a 200 per cent return on investment by dumping stock futures just ahead of the slump and buying it all back in the trough. According to market sources he first showed an interest in the Aussie dollar in 1995. He was believed to be behind billion-dollar sell orders that sent the dollar tumbling more than one US cent in a day. His bad deeds include the illegal damming of protected wetlands in Maryland to create a duck-hunting retreat. He paid fines and restitution of $2 million. His good deeds have included the outlay of several hundred thousand dollars pushing for environmental funding for the restoration of the Florida Everglades. That's where the less harmful alligators live.
THE 'HEDGEHOGS'
George Soros, 69 Chairman of Soros Fund Management; principal investment adviser to Quantum Group of Funds. Personal fortune: More than $5 billion. Soros created a Wall Street income record of $US650 million ($A936 million) in 1992. His Quantum group has assets of nearly $15 billion. His philantrophic foundations give away half his personal income.
Paul Tudor Jones II, 44 Founding president of Tudor Investment Corp. Regularly among the top 10 income earners on Wall Street. Topped Financial World's income list in 1988 at between $US80 million and $US100 million. His 1994 income was reported to be $45 million.
Julian H. Robertson junior, 65 Founder and chairman of Tiger Management Corp. Sometimes known as the Wizard of Wall Street. He turned $8 million of investor funds in 1980 to $7 billion and consistently records an investment income of 50-70 per cent. His income in 1993 was said to be more than $1 billion.
Top hedge fund managers: Soros Fund Management, Tiger Management, Omega Advisers, Moore Global Investments, Zweig Dimenna Associates, Everest Capital, Sloane Robinson Investment Management, III Associates, Orbis Investment Management, Swiss Bank.
INSIDE HEDGING
Influence * Latest estimates indicate nearly 5000 hedge funds manage
$US225billion of capital.
* Hedge funds have led every charge against currencies during the past 15
years, including the Australian dollar in 1986, the British pound in 1992,
the South African rand and Thai baht in 1998.
* Hedge-fund managers are among the highest earners in the financial services
industry.
Structure
* Hedge funds are private investment partnerships with less than 100 investors
each.
* Free of regulation and can trade in any securities or financial derivatives
in any market in the world.
* To escape regulation by the US Securities Exchange Commission they must
have no more than 99 investors. At least 65 of these must be accredited with
a net worth of at least $1 million.
* The funds are managed by a general partner who usually receives 20 per
cent of the profits, plus a fixed management fee of up to two per cent of
the assets under management.