George Soros' Fund Closing Reflects Current Social Mood

Yesterday, Bloomberg featured an article by Katherine Burton and Roben Farzad on George Soros’ decision to close his fund, entitled “Golden Era of Rock Star Traders Concludes”.

In the article the authors offer, “There’s a two-word explanation for closing what was once one of the world’s biggest hedge funds and consistently one of the best-performing -- with returns of about 30 percent annually in its first 30 years: Dodd-Frank.”
Personally, I’d have chosen two other words: social mood.

To blame regulation, in this case Dodd-Frank, is to ignore (or at least not wonder) why the regulation exists in the first place.
And to me that answer is pretty easy: deteriorating social mood. The less confident we are, the more we want to be protected from the potentially bad things that are out there. And there is nothing like the other side of burst bubble to help expose all those potentially bad things. When we are less confident we scrutinize more too.

Politicians and regulators are none too happy to respond to our deteriorating mood with more regulation. And you can just look at the timing of Dodd-Frank to see that. The bill was proposed in December 2009, just nine months after the markets bottomed in March.

But then there is Mr. Soros’ decision to close his fund to outsiders. This too is a reflection of deteriorating social mood.

Earlier this week Justin Rohlich wrote a piece -- Greek Consumers Cut Alcohol, Fast Food as Austerity Bites -- about the changing food habits in Greece, in which he noted a recent BCG report which offered:

...the economic crisis has helped Greeks rediscover the joys of entertaining or visiting friends at home rather than going out for a meal or drinks. Family and friends, according to the survey, have become a key factor in keeping stressed-out Greeks on an even keel, with 49 percent saying that when they’re worried they turn to family and 39 percent admitting that they seek out the company of their friends.

Put simply, I’d offer that Mr. Soros is just a late adopter to a much more significant inward focus that goes along with deteriorating social mood. As the Wall Street Journal headline put it earlier this week, “At Soros, Family Is Foremost”.

And in a declining social mood environment, you bet it is! And I bet you didn’t even blink at the word “outsiders” that I used to describe non-Soros family members above.

The reality is that our relationship networks shrink as our social mood wanes. It should be no surprise that Mr. Soros, like Mr. Icahn and others before him, is closing his fund to “outsiders”. There will be plenty more fund closings ahead as increasingly inward-looking managers naturally respond to heightened, social mood-driven regulation and say “Enough!”

But please appreciate that it is not just hedge funds that are being closed to “outsiders.” Over the past year, we have seen increasing steps taken by nations to curb unwanted currency flows from “outsiders” and in Europe, border crossings have been erected between nations despite that region’s promise of free labor mobility. And then there’s that wall on the southern border of Arizona.

How we act is a direct reflection of how we feel.

And to these eyes, the actions I see suggest that we, now including Mr. Soros, increasingly don’t feel so good.