Druckenmiller exit suggests fund size may matter

August 18, 2010

Stanley Druckenmiller’s departure may reveal something important about hedge funds. The famed investor plans to close down his 30-year-old, $12 billion firm, Duquesne Capital Management. On one level, it’s just a very rich guy wanting to play more golf. But on another, it suggests bigger fund firms may struggle to live up to past glories.

The onetime George Soros colleague clearly doesn’t need the money. Forbes pegged Druckenmiller’s wealth at $2.8 billion earlier this year. But he hasn’t wanted for years, and he’s only 57. The desire to keep winning has kept other billionaires involved in the investing business far longer. His old boss Soros, for instance, just turned 80. Warren Buffett is only a couple of weeks off that landmark and Carl Icahn is well into his 70s.

Early retirement can have its appeal. There’s nothing wrong with recognizing the toll that managing other people’s money can take. And investors with considerably smaller fortunes have been lured by the golf links. Druckenmiller, a seven handicap, cited both factors in his decision, according to an interview with Bloomberg. The billionaire also has serious philanthropic interests.

But there’s another factor. Duquesne is down some 5 percent so far this year. Druckenmiller’s vehicle has never lost money over a full year. He implied that managing more than $10 billion makes it hard for him to meet performance standards he sets himself, having delivered average annual returns of 30 percent or more since 1986.

Investors would be wise to reflect on the point. Much new hedge fund investment is currently going to the biggest firms — some of which now manage more than $30 billion each. They offer diversification and the plentiful resources and infrastructure that comfort many institutional investors. But they also need to find bigger opportunities, take more risk or settle for lower returns than otherwise similar smaller funds.

The succession question here offers an opportunity in this regard. Some notable fund founders have passed the baton to groomed successors, as Jim Simons did last year at Renaissance Technologies. But in other cases, like Druckenmiller’s, stepping back means investors will get their cash back and have to redeploy it. Given what Druckenmiller seems to be saying about the challenges facing the largest firms, he may have just left investors with a valuable parting tip.

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