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How Hungarian analysts see Soros' hedge fund lockdown

George Soros has always had special significance for Hungarians. For laypeople, it was mostly due to the fact that he was born in Hungary and became a gazillionaire. Financial insiders, however, also know that he pulls many strings in Eastern Europe. Could his funds' closing affect investments in the region?

Hungarian-born billionaire and businessman George Soros has told investors that he will return roughly $1 billion to outside investors and turn his hedge fund into a family office. According to news agency Bloomberg, in a letter to investors, Soros’ two sons cited impending industry regulation as the reason for returning the money the fund still oversaw for outsiders, which is a relatively small percentage of the roughly $25 billion Soros invests.

Soros’s sons said they took the decision because new financial regulations would have made it necessary for the firm to register with the US Securities and Exchange Commission (SEC) by March 2012 if it continued to manage money for outsiders.

Soros was born in Hungary in 1930, and emigrated to England in 1947. He moved to New York in 1956, where he worked as an arbitrage trader and analyst for the first few years. He founded Soros Fund Management in 1970, and three years later set up his own hedge fund.

He has also been known for currency speculation: on September 16, 1992, Soros's fund sold short more than $10 billion worth of pounds, profiting from the UK government's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency.

Finally, the UK withdrew from the European Exchange Rate Mechanism, devaluing the pound sterling, earning Soros an estimated $1.1 billion. For this action, he was dubbed “the man who broke the Bank of England”.

Soros’ firm was also involved in an attack against Hungary’s largest lender OTP Bank in 2008. Hungarian financial market watchdog PSzÁF fined Soros Fund Management $2.2 million, saying that it illegally influenced the bank's share price on October 9, 2008, when huge quantities of short-selling orders came in just before the session closed, sending share price down by more than 10%.

These days, he focuses on his philanthropy and on voicing his views on macroeconomic events, such as the sovereign debt crisis in Europe.

Soros opened his first foundation, the Open Society Fund, in 1979, when his fund had reached about $100 million and his personal wealth climbed to about $25 million. His initial focus was on promoting democracy and a market economy in Eastern Europe. Soros now funds a network of foundations that operate in 70 countries around the globe.

Soros spent some $8 billion on charity in the last 30 years.

Just most recently, he wrote in the Financial Times that unless precautionary measures will not be taken to localize the crisis to the PIGS countries (Portugal, Italy, Greece and Spain), the collapse of the eurozone looks almost inevitable.

The rule calls for hedge funds with more than $150 million in assets to report information about their investors and employees, the assets they manage, potential conflicts of interest and their activities outside of fund advising. Registered funds will also be subject to periodic inspections by the SEC.

“We have relied until now on other exemptions from registration which allowed outside shareholders whose interests aligned with those of the family investors to remain invested in Quantum,” the executives said in the letter to executives, referring to Quantum Endowment Fund. “As those other exemptions are no longer available under the new regulations, Soros Fund Management will now complete the transition to a family office that it began as eleven years ago.”

Quantum Fund, considered as one of the most successful hedge funds in the world, has returned 20% on average a year since 1969. Its heydays were in the 1970s, realizing yield of nearly 4200% over the decade. However, the fund’s performance has suffered in the last 18 months. In the first half of this year, Quantum lost about 6%, according to Bloomberg who cited a person familiar with the firm.

Analysts say that closing down Quantum Fund will not likely to have significant effects on Hungarian money markets.

“In my opinion, the gap left by a hedge fund of this type will be immediately filled in by others,” Tamás Gerőcs, analyst at Equilor Investment Zrt, told the Budapest Business Journal.

In general, the analyst does not contribute great significance to the withdrawal of investment guru Soros from the open hedge fund market, but “markets tend to pay tribute to such events,” Gerőcs noted.

“It is more of a symbolic move, as Soros has not been participating directly in managing his funds for years anyway,” András Somi of KBC Securities said, agreeing with other analysts that the current announcement will not influence Hungarian financial markets.