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and some of them are so eso- r teric that the risk involved may not be properly understood even by the most sophisticated investor, and I'm supposed to be one. Some of these instruments appear to be specifically designed to enable institutional investors to take gambles which they would not otherwise be permitted to take.

"We use options and more exotic derivatives sparingly. Our activities are trend-bucking rather than trend-following. We try to catch new trends early, and in later stages we try to catch trend reversals."

Soros left the distinct impression that he would not mind if Congress decided to regulate derivatives. "If you look at the instruments that came unglued recently, or instruments where you separate the interest from the principal ... I am not quite sure that they are really necessary."

(Writing in The Wall Street Journal, Tim W. Ferguson observed that Soros had been a bit unfair here; just because some others had suffered losses recently, "that doesn't behoove an investment luminary to cast aspersions before Congress on a technique for which he has no use.")

Soros felt guilty endorsing regulation, and he admitted that others in his ffrm had tried to convince him to speak out against it. "You know," he told Rep. Bruce Vento, a Minnesota Democrat who had asked him about recent volatility in financial markets, "as we were preparing for my appearance here we talked about this a little bit. I said that frankly it may be the issuing of derivative instruments [that] ought to be regulated. And then my partner . . . pointed out that unfortunately regulation has an unintended consequence, because the regulators are interested only in the downside; they are not interested in the upside. In other words, they want to avoid a catastrophe.

"So ... if you imposed an obligation [to register derivatives with a commission, like stocks] ... it would really create a bureaucratic resistance because of this asymmetry between the interests of the regula tors and the interests of the market. And so he dissuaded me from making that recommendation."

Soros was not the only one at the hearings to testify against the need for further regulation. Regulators testified, downplaying the risk that hedge funds and derivatives posed to the banking system and to investors. The comptroller of the currency, Eugene Ludwig, noted that eight national banking firms had no more than an average 0.2 percent of assets at risk in derivatives. Arthur Levitte, Jr., chairman of the SEC, assured the hearing that nearly all hedge-fund activities were already highly regulated under current banking and securities laws, so no new regulation was required. The three regulators who testified all thought more information was required. "We're not in favor of regulation," stated John P. LeWare, a Federal Reserve Board governor, "but we have a strong tilt toward more disclosure." What was the committee's reaction to the Soros presentation?

Thomas Friedman, writing the next day in the New York Times, summed up their feelings well: "Members of the House Banking Committee seemed to alternate between awe at being schooled by the man with the Midas touch and immense curiosity about the secretive world of hedge funds-the partnerships of wealthy investors that scour the globe for often-exotic investments in currencies, bonds and stocks. The mystique of the funds seemed to have been burnished-rather than tarnished-by tales of the wide swings they experience, including Mr. Soros's loss of $600 million in one recent currency deal. . . ."

Soros left no stone unturned in making his point that day in Washington. It was not enough to take on Congress. He sought to convert the media as well. Assigned to that task was Robert Johnson, a Soros Fund managing director who accompanied his boss to Washington. In posthearing remarks to the press, Johnson indicated that more work needed to be done to educate Congress and the public about what George Soros the investor did. "The biggest problem is the mythology of hedge funds. There will be more interaction with the press."

In an apparent effort to show more candor, Johnson revealed how Soros allocated his assets and how he used leverage.

• 60 percent of Soros's capital was usually in individual stocks; Soros rarely traded on margin in this category.

• 20 percent was devoted to macro trading-bets on currencies and global indexes; in this sector, he had sometimes leveraged as much as 12 times his capital.

• The other 20 percent was in what Johnson called "precautionary reserves" such as T-bills and bank deposits. This 20 percent cushion, he said, was to be used "to buy time in adverse circumstances to cushion the portfolio." In other words, to meet margin calls.

George Soros had gotten through the hearing, and from all indications, he had acquitted himself well.

Two months later, Byron Wien had dinner with a member of the SEC. The hearings and Soros's appearance came up. Wien reported later that the SEC member "said that he thought George did such a great job that the SEC stopped worrying-and Congress stopped worrying about hedge funds." All in all, Soros could be immensely satisfied.

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