Page 35

erage assets of $500 million for every $1 billion of stock market capitalization. They lost the edge when they attained elephantine size. Since the start of 1994, with relative assets reaching $3.5 million for every $1 billion of stock market capitalization, these five funds lagged the S&P 500 index by more than 4 percentage points a year. As the managed funds' relative assets increased sevenfold, their relative performance suffered a net decline of more than 14 percentage points annually.6

Warren Buffett's experience is similar. "For the entire 1950s, my personal returns using equities with a market cap of less than $10 million were better than 60 percent annually. At our present size, I dream at night about 300 basis points."7

A fund becomes so large that it has difficulty finding market opportunities that fit its target return/risk criteria. Soros and Robertson were seeking value opportunities in stocks, bonds, currencies, and commodities where they had historically achieved net returns of over 25 percent.

To ensure broad diversification, managers may set limits on the maximum percentage a position may represent in the overall portfolio—for example, 5 percent. Very few firms want to hold as much as 10 percent of a company's shares, because dominant ownership positions may constrain market liquidity.

As a fund becomes very large, it also gets so closely watched on Wall Street that it hurts. A large company leaves signs that it is taking a new position in a stock. It is possible to come up with an accurate approximation of the group's holdings by looking at federal filings that managers must make if they own a certain percentage of the company. Its footprint makes it too visible in the market. Other investors watch and copy.

Soros and Tiger had been hammered because of their size, while more nimble funds managed to exit positions more easily. The problems with the Japanese yen–U.S. dollar carry trade may be illustrative of this point. This trade had made considerable profit for Soros and Robertson over the prior several years, but the trade caused problems in late 1998/early 1999. Soros had problems with the yen-dollar trade in February 1999. In October 1998, Tiger also lost about $2 billion in the trade. Investor sources say Tiger again had problems in January 1999 when it was short the yen and short Japanese stocks. The Japanese market bounced back, causing the manager severe problems.

Another concern is that as a fund increases its assets, management re-