You’ve been very critical of recent American leadership.
The U.S. is still the most important country in the world, so obviously the way the U.S. is run has a tremendous impact. It’s ironic that right now the Chinese have a lot more discretion in deciding what’s going to happen economically than we do. It’s the outgrowth of running up our current-account deficit. That we got into that situation is largely because of the way we have managed our affairs.
What’s your position on hedge fund regulation?
It’s the role of regulators to prevent financial crises — and they haven’t done that. I’m as opposed to excessive regulation as I am to excessive freedom for leaving it all to the market. I advocate better regulation: You’ve got to regulate the availability of credit and of money. The instruments exist, but they aren’t used. We have margin requirements and minimum reserve requirements, but they’re meaningless because we’ve got so many synthetic instruments that allow investors to escape them.
How exactly would you limit hedge fund leverage?
I don’t think that I would apply leverage limits directly to the hedge funds. I would apply it through the banks. The banks would have to have more minimum reserve requirements if they are lending to a Long-Term Capital Management because it’s got more leverage than a Quantum Fund.
In your book — published in April — you present a bleak view of market conditions. Where do you stand today?
The dollar has found a temporary bottom, so I wouldn’t necessarily short it. I still think the right thing is to be short stocks, U.S. and European. The market believes that the worst is behind us and that it’s the time to put money in, and I disagree with that. It’s a bear market rally, and I’m surprised actually at how extended it is. I think that the double jeopardy of looming recession and inflation is a killer.
What is it that separates the good hedge fund managers from the great ones?
The most unlikely people are the most successful. The real test is whether the hedge fund manager is good for all seasons. Some are, and some aren’t.
The Soros way has been described as “unfathomable and unknowable,” and your own son once said you make investment decisions based on whether your back is hurting. Is there some mysticism in what you do?
I don’t think there’s any mysticism, but you are dealing with the unknowable. My philosophy — or my theory about markets — emphasizes that the prevailing paradigm underestimates or disregards the element of uncertainty. I consider myself an insecurity analyst, not a security analyst.
What can you possibly gain from publicizing your investment philosophy?
I’m at the end of my career, so I have an excessive commitment to the pursuit of truth. I’ve been pursuing the truth in my investments. Being a hedge fund manager is particularly suitable for the pursuit of truth.
Do you enjoy investing as much as you used to?
No, because my knowledge is outdated; it’s like an old man — your range of movement is constrained. The young man, he can jump and hit and skip; as an old man you can only plod along. I can use only blunt instruments, and I have only a very general understanding of what goes on. I used to have much more detailed and in-depth knowledge.
Was your shorting of the British pound and nearly breaking the Bank of England your most memorable trade?
That’s obviously the one that’s best known. On the negative side, my purchase of Svyazinvest (the regional Russian telephone company operator) is the other sort of outstanding event. I lost probably a billion dollars or something.
Back in the ’60s, when you were working with the investment firm Arnhold and S. Bleichroeder Advisers, you started one of the first hedge funds. How did you do it?
In 1969 I set up a model account with $100,000 of Arnhold and S. Bleichroeder’s money, and it was matched by an Italian banking family from Milan. I divided it into 16 slots. I invested one or two slots in any one stock, and then I wrote a memo explaining why I bought that stock. I wrote sort of a monthly report as a service to institutional investors. Eventually, I separated from Arnhold and S. Bleichroeder.
Can the industry continue its exponential growth?
There may be a weeding-out process, but a hedge fund is a superior way of running money — or it has been. But as the industry gets bigger and bigger and takes up a larger and larger segment of the market, it renders it more difficult to outperform and to justify the fees.
Where do you stand on hedge fund taxation and pay?
Treating the incentive fee as earned income makes sense. I’m not advocating it — I’m not going that far — but I’m not opposing it either. Compensation is a much bigger issue now in the U.K. than it is in the U.S. I’m struck by how prominent it is there. The big discussion is regulating compensation, not only for hedge funds but also for investment banks. It’s a public opinion thing. Look, obviously the sums that can be earned by hedge fund managers are egregious, and that is a factor in why I’m giving away most of my money.
Of course you recognize the growing tendency among institutional investors to lower their risk exposure.
They’re looking for lower volatility, and they are paying a very heavy price for lower volatility: They’re losing performance.
What do you hope your legacy will be?
My ambition is as a philosopher, and I’m more interested in whether I have some ideas that can survive me than in preserving my wealth beyond my lifetime.
Explain “reflexivity,” as you call it, especially as it relates to your effort to spread democracy.
They are intimately connected. Fallibility, reflexivity and an open society are the three key terms for my conceptual framework. Think of it this way: There’s a fundamental difference between natural phenomena and human phenomena because natural phenomena occur without human thinking entering into the causal chain. Human thinking seeks only to understand that chain, and since it doesn’t enter into it, the events, the facts, are an independent criterion by which you can actually tell whether your understanding is true or false. That’s the success of natural science.
But when it comes to human affairs, thinking has a dual function — cognitive and manipulative. Those two functions work in opposite directions, and they can interfere with each other. That’s reflexivity. So reflexivity and fallibility go together. And because you cannot attain the ultimate truth of what’s right and wrong — we don’t have the ability to actually nail it down — you need institutions that allow pursuit of the truth, critical thinking, people with different views to live together and still make decisions. That’s open society.
But that just complicates things.
Of course. That’s the problem, you see — that reality is too complicated. It’s more complicated than your understanding, and the more progress you make and the more power you have to influence reality, the more complicated the problem gets. It’s much harder to make decisions knowing that you may be wrong than acting on the belief that you’ve got the ultimate truth.
— Interview by Karl Cates