The reason Soros makes so much money stems from his ability to stand outside the market and find faults in its current thinking

INVESTMENTS

If George Soros were a share, how would he be rated today? The world's most famous international speculator is surely now, to borrow some market terminology, ''overbought''. His opinions certainly seem to count for less than they did a couple of years ago, when his fame as the man held to have pushed sterling out of the Exchange Rate Mechanism was at its height.

But now, as I mentioned here a few weeks ago, some of the gloss seems to be coming off the Soros legend. Although his Quantum Fund has done well from the recent switchback in the fortunes of the dollar and yen, last year's performance was exceptionally poor by his standards. In his new book, just published in this country*, he himself claims that his role in the ERM crisis has been exaggerated. He was, he says, ''just a member of the crowd'' that was betting against sterling's survival in the ERM. He didn't even take the Quantum Fund's decision to bet against the pound himself.

While Soros concedes that his public statements now have the power to move markets, he insists that his influence even there is ''largely illusory''. These days, when he bets against the market, he says wistfully, more often than not he justs gets ''trampled on''. In February 1994, to take the most glaring example, his funds lost $600m in a month when he failed to spot the turn in the US bond market, just as he had been caught out by the Wall Street crash in October 1987.

Don't be fooled by his public display of abashment. Soros's track record as an investor remains quite exceptional; every dollar invested in his funds at the start in 1969 would now be worth $2,150, a compound annual return of 35% per annum. The nature of the funds he set up inevitably makes their performance very volatile, but the results speak for themselves. In fact, there has never been an investment fund quite like the Quantum Fund. It is about as far removed from the kind of fund into which ordinary investors in this country can put their money as it is possible to be.

At least three things distinguish the way Soros operates from the way that the average unit trust or investment trust is run.

o Leverage: Soros is willing to take on large amounts of debt to back his judgement about the way markets are likely to move. Unit trusts by contrast are not allowed to use debt. Investment trusts can borrow, but most typically do not employ anything like the gearing that Soros does. The effect of borrowing is to multiply the returns to shareholders - if the markets move the right way. If the investment goes wrong, it multiplies the losses too.

o Flexibility: Most unit trusts and investment trusts have rules that govern where and how they can invest. An increasing number are specialist funds dedicated to specific countries or sectors. Pension funds are (rightly) even more constrained in what they can do. Soros by contrast set his fund up in such a way as to give him the freedom to invest more or less where and when he likes. He ranges widely across the world's currency, stock and bond markets; and is free to go short as well as long - ie he takes bets that prices will fall as well as rise. Investors know they are taking on extra risk when they put money with him.

o Ownership structure: Most investment funds are run by professional fund managers acting as agents. Their performance is measured by how well they do relative to the market as a whole. Soros by contrast retains asignificant ownership interest in his funds. He takes a share of the profits when the fund goes up - and nothing if the fund goes down. It puts the focus on the absolute performance of the fund, not on how well it does relative to everbody else. (If the stock market falls 10 per cent in a year, any pension fund manager who loses only eight per cent is reckoned to have done exceptionally well. For Soros, it would be a terrible year.

The upshot of these arrangements is that Soros has what is arguably the purest performance-driven investment vehicle of its kind anywhere in the world. Just as remarkable is that he has changed the way the fund operates at least four times since he first set it up. This flies in the face of conventional wisdom that the way to make money as an investor is to find a disciplined way of investing and stick to it

This fluidity is surely the key to his success. Most readers of his books say they come away baffled by the investment methods he describes.

I don't believe a word that Soros says about the markets; nor, I think, should anyone else. The reason Soros makes so much money stems from his ability to stand outside the markets and find the fautls in its current thinking.

His fund is a laboratory that is constantly testing investment hypotheses and probing for its flaws. But, as someone to listen to about the markets, it makes him virtually impossible to trust.

Soros on Soros. Published by John Wiley, pounds 14.99.