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The Trade of the Century: When George Soros Broke the British Pound

238 points by nols 12y ago

alexmayyasi 12y ago
I'm interested to hear people's reactions to the article and the Soros trade. I'd also like to know what the HN crowd thinks about opinions like this recent New Yorker article that asks how hedge funds "get away" with charging such high fees without producing superior returns: http://www.newyorker.com/online/blogs/johncassidy/2014/05/how-hedge-funds-get-away-with-it.html http://www.newyorker.com/online/blogs/johncassidy/2014/05/ho...
- wslh 12y ago
  How do you connect these articles? The Soros funds gave high returns along their life.
- Tycho 12y ago
  One reason the article didn't mention is that investors want their portfolio managers to be highly incentivised. If a hedge fund manager is paid 2% of the AUM after growth and 20% of the profits each year, then they have a golden opportunity. Incentives for traditional mutual fund management are not as exciting and to the investor, the actual performance is almost an afterthought compared to the initial asset allocation decision.
  - makomk 12y ago
    The trouble is, assuming that returns are essentially random and that hedge fund managers cannot beat the market except through luck - which seems to be more or less true - it doesn't matter how much you incentivise them. Giving them a bigger cut of the profits just means you come out worse on average. Now, it's certainly in the interest of hedge fund managers to convince investors that giving the managers a bigger cut is in the investors' interest, but that doesn't make it true.
    - Tycho 12y ago
      But if you truly believed that returns are random then you definitely wouldn't be investing in a hedge fund anyway, so I'd say that's a moot point.
- melling 12y ago
  Sounds like Soros has produced superior returns. http://www.news.com.au/finance/markets/george-soros-quantum-endowment-fund-makes-55-billion-in-2013-most-successful-in-history/story-e6frfm30-1226823459957 http://www.news.com.au/finance/markets/george-soros-quantum-...
  - orbifold 12y ago
    Probably either insider information or selection bias.
- cdk 12y ago
  I believe the 20% cut that the manager make is after they clear a benchmark like the S&P 500 to ensure they get paid when they produce a superior return compared to what an index fund could deliver.
  - patio11 12y ago
    This is not a very meaningful hurdle, though. For example, let me pitch you on the Patio11 Hedgehog Fund. It uses complicated financial alchemy to produce market-beating returns, and you only pay if we beat the market. The fund has never lost money. Care to invest $10 million? You pay 2% per year and 20% of returns above the S&P 500. Hypothetically suppose the S&P is up 10% next year. I deliver 20% returns. Alchemy, what can I say. You make $1.6 million, I make $0.4 million (from you), and since I did this in parallel with 100 other people life is pretty grand for me. Now just between HN and me, my strategy is simple: I buy the S&P 500 as an index but I use 2X leverage. What would have happened if the market went down 5% next year? Well, we would have lost 10%. That certainly sucks, and you need to make your $1 million back. Which is great, because I am now accepting new money on the Patio11 Chinchilla Fund. It uses complicated financial alchemy to produce market-beating returns, and you only pay if we beat the market. The fund has never lost money.
    - kasey_junk 12y ago
      Well to be fair, it's also not the real hurdle than any investor in Hedge funds use. It's more of a marketing term than anything else (and often funds don't target the S&P as their benchmark, but something else closer to their trade category). Almost all investors in hedge funds will want to see the portfolio of all previous funds you've managed as well as how much of your own money you have in the fund, how much leverage you are doing, alpha, beta, risk adjusted metrics etc. That said, the Hedge Fund industry is going through a consolidation. Lots of small funds were essentially S&P indexes with leverage/hedges and execution ability. The rise of ETFs, the decrease in execution costs, and the creation of a true history of performance has made those funds pretty obviously useless and they are (rightly, I believe) dying.
truantbuick 12y ago
I don't know that much about finance, so can somebody explain to me why I never hear anybody censuring Soros over this? I only hear congratulations for bamboozling the incompetent British government. He made billions at the expense of an entire country. I'm not saying it was illegal, and maybe people like Soros are needed to help deter governments from artificially manipulating their currency like the British did. However, when it comes down to it, he benefited by executing a bet meant to enrich himself, compound the problems of the pound, and diminish the wealth of a nation. It seems like a plainly immoral thing to me.
- ProAm 12y ago
  He played the game according to the rules. You can't fault a winner when he wins on a even playing field.
  - AndrewBissell 12y ago
    In fact, Soros won on a playing field tilted against him. He went up against a sovereign country with taxing power, and won.
  - truantbuick 12y ago
    Using these kind of game metaphors just shallowly rationalizes something of far more importance, IMO. Legal or not, a country was worse off because of his direct and deliberate actions.
    - AndrewBissell 12y ago
      No, the country was worse off because of its government's decision to prop up the currency in an unsustainable way. Soros just happened to be the instrument by which the market finally clobbered England over the head. It could have been some other speculator or group of speculators, and it could have played out over a longer time period (possibly at even greater loss to the British public), but it would have happened sooner or later.
    - justin66 12y ago
seizethecheese 12y ago
It's interesting that the loss to the Bank of England is attributed almost entirely to Soros. If you accept that the fixed rate was unsustainable then even without Soros the Bank of England would have been forced to defend an untenable position, and eventually would have lost enough to give up. It's reasonable to assume that the acceptable losses for the Bank of England would have been similar whether they were sustained in one day or over the period of weeks or months. Soros' brilliance was to see the inevitable and take almost the entire opportunity for himself.
- the_watcher 12y ago
  I wouldn't call myself a Soros fan, but I don't think people generally blame him (alone, at least). Most people I've heard from on this recognize the gross incompetence of those running the Bank of England, and the biggest problem anyone has with Soros is on moral grounds more than anything (exploiting incompetence to essentially take money from British taxpayers without providing them anything in return).
  - seizethecheese 12y ago
    The article's first sentence: > In 1992, George Soros brought the Bank of England to its knees. You're right that many well-informed people don't blame Soros alone, but the sentence above pretty well encapsulates the mythology surrounding this story. It would be more accurate to say: "the day George Soros hastened the collapse of the ERM."
- marvin 12y ago
  The big question is whether the Bank of England would have sold so much GBP if this was allowed to happen gradually rather than overnight. The real problem is still political incompetence, but there's no guarantee that the losses of the British taxpayers would have been equally large if Soros's fund had not made such a spectacular short which sparked a political pissing match.
  - seizethecheese 12y ago
mikecb 12y ago
| 2.78 DM to 3.13 GBP. I think they mean between 2.78 and 3.13 DM per GBP.
AndrewBissell 12y ago
Politicians always like to blame speculators when their attempts to fight the market inevitably end in failure, and this instance is no different. Soros didn't "break the GBP," it was already broken and the British government's guarantee to prop it up was never sustainable in the first place. Someone was going to a lot of make money when the British government's scheme unraveled. Soros just happened to make a lot more than anyone else. Reminds me of a good Rhett Butler quote: "Opportunists have always been held in disrepute. Especially by those who had the same opportunities and didn't take them."
- PhasmaFelis 12y ago
  It was going to happen anyway, so there's nothing wrong with benefiting from it, yes? If a man with diamond cufflinks and a fat wallet is passed-out drunk on the sidewalk at midnight in a bad neighborhood, he is definitely going to get robbed. Does that mean I should go ahead and rob him myself with a clear conscience? I guess, according to you and Rhett Butler, I'm just jealous because I didn't pickpocket the last drunk I met.
  - CocaKoala 12y ago
    Well, no. Robbing a passed out drunk is a crime; you should feel bad for committing crimes, even if it's clear that if you didn't somebody else would. Shorting a stock (or a currency) is not a crime; it's an acceptable thing to do in a market.
    - PhasmaFelis 12y ago
      I was under the impression that we frown on screwing innocent people because it's a shitty thing to do, not because it happens to be designated as a crime. I'm not saying that what Soros did should be illegal, mainly because overregulation can wind up screwing innocent people in all sorts of different ways that I'm not wise enough to predict. But I surely don't understand why he's being held up for praise.
      - 12y ago
PhasmaFelis 12y ago
Why is it that taking advantage of loopholes and incompetent bureaucracy to take things from innocent people is monstrous if you do it on a small scale, but heroic on a national scale?
- AndrewBissell 12y ago
  Why is it no one ever puts the blame on the incompetent bureaucracies that are actually responsible for losing their countries' money?
  - PhasmaFelis 12y ago
    Don't you think there's plenty of blame for everybody? If I leave my keys in the ignition with the window down and my car gets stolen, it's my own fault for being careless, but that doesn't mean the thief is innocent.
    - kansface 12y ago
      There was neither a thief nor a theft. The equivalent would be if you declared you would attempt to fix the price of all Camrys. You buy a huge number of them to prop up the price. Some third party thinks this is stupid, borrows some Camrys and sells them for dollars. Eventually you run out of money and the price falls. There is no theft- it was simply a bad position for you to take in the first place. Baring any ethics, should governments be immune from loses in open markets? Who would participate?
      - zacinbusiness 12y ago
        An elite few wealthy politicians decided how millions of people's money would act in the global economy. They made a bad call, obviously. But Soros and company weren't forced to "go for the jugular." They could have effectively "taught the British government a lesson" by making a few hundred million dollars and leaving the currency in tact, rather than completely decimating it. It's just greed. And the fact that so few people can see that is alarming.
temuze 12y ago
Can someone explain to me what the effects of China's artificial devaluation of the yuan vs the dollar are? I understand that they are doing this to make themselves more competitive as an export economy, but can they really keep it up? I mean, to maintain this valuation, they have to constantly sell yuan and buy dollars, but they can't do that forever, right? So when the yuan finally increases in value, will the dollar's value crash?
- klodolph 12y ago
  Maybe the dollar's value will crash relative to the Yuan. If you make a bet like George Soros that the Yuan is going to rise in value, what would that bet look like? One of the problems with the bet is that you are betting in the opposite direction from Soros. China can just print more Yuan, and suddenly Yuan decrease in value. Add to this the ridiculous levels of pointless internal investments, seemingly done to inflate China's GDP. And finally, there are severe problems with Chinese equity markets that make it scary to bet on Yuan against USD. I think at some point in the future, China will stop having an export economy, because advances in manufacturing technology and automation will obviate the need for cheap labor. And at some other point, China will start investing sensibly in internal matters. I have no idea how to translate this into USD or CNY, but if I were in China, I would want the transition to happen gradually. A gradual transition avoids destroying the manufacturing sector overnight.
  - cinquemb 12y ago
    I don't know if this is related directly, but seeing as Soros is in on the largest gold mining company in the world and other gold companies related etf's[0], doesn't that speak somewhat to the type of bet he's making in this landscape? [0]: http://www.reuters.com/article/2014/05/15/hedgefunds-filings-gold-idUSL1N0O127W20140515 http://www.reuters.com/article/2014/05/15/hedgefunds-filings...
    - zacinbusiness 12y ago
      Very good observation.
the_watcher 12y ago
So this is basically the worst case scenario of activist monetary policy by governments, right?
- emiliobumachar 12y ago
  Wrong. Worst case scenario, they'd double down and keep fighting the market until the country was completely bankrupt.
pjc50 12y ago
In some ways, this was a comparatively cheap way for the UK to discover that fixed exchange rates between economies must force the pressure into current account deficits instead; such as has happened to Portugal/Ireland/Greece/Spain. Falling out of ERM kept the UK out of the Euro, which was beneficial in the long run.
- M2Ys4U 12y ago
  >Falling out of ERM kept the UK out of the Euro, which was beneficial in the long run. Perhaps. That's certainly conventional wisdom, but we have no way of knowing what the political or economical landscape would have been if the UK stayed in the ERM and was now in the Eurozone. 20+ years is a long time.
  - TazeTSchnitzel 12y ago
    Were it not for Brown, we might have joined the Euro.
- claudius 12y ago
  The PIGS countries would be much worse off outside the eurozone than inside, to see this, just compare the recent economical dips to the massive increase in activity following the introduction of the Euro in 2002. And to say that a country without any industry is even remotely in a good position (implied by “beneficial in the long run”) is a rather curious thing, too.
  - pjc50 12y ago
    country without any industry This description does not match the UK, no matter how many "manufacturing is dead" articles you read in the papers.
loso 12y ago
A pretty good documentary from the BBC about Black Wednesday. Shows more from the government side and the mistakes they made than Soros part but still gives you a good understanding of what happened. http://m.youtube.com/watch?v=K_oET45GzMI http://m.youtube.com/watch?v=K_oET45GzMI
westiseast 12y ago
If you see an online service whose online security is terrible, do you (a) notify the company (b) hack them and privately inform them off the exploit or (c) hack them, steal all the data, sell it on the open market and make a million pounds, simultaneously disadvantaging millions of average customers?
- AndrewBissell 12y ago
  LOL, I can just imagine the scene now: INTERIOR, HER MAJESTY'S TREASURY OFFICE PHONE RINGS SOROS: Hi, my name is George Soros, I'm a hedge fund manager and international speculator. I noticed that you're trying to prop up the British pound, but rather than try to profit from this, I figured I'd just call and give you guys the heads up that it's not going to work. TREASURY OFFICIAL: Oh my God, you're right! We'll issue a public statement right away, admitting that we've been wrong and that we're putting an immediate end to the policy. Thanks so much for the warning, kind sir!
  - westiseast 12y ago
    Hahaha, they'd just say sorry a thousand times the mutter something about immigrants.
  - fabulist 12y ago
    "In light of this development, we're starting a Fiscal Policy Bug Bounty program...."
- CocaKoala 12y ago
  A better comparison would be: You find an online blackjack service that uses pRNGs, and can reverse the state of their decks in real time. Do you (a) notify the company or (b) play a bunch of blackjack and clean out the house? George Soros didn't hack anything or steal anything; he made use of publicly accessible information to make a gamble and he won big. The consequences of that win were certainly crummy for a whole bunch of people and it's terrible that a lot of innocent people were put in that position, but to compare Soros to a criminal is pretty disingenuous.
deleted 12y ago
[deleted]
coreymgilmore 12y ago
Free markets always win. The markets have a very good history of correcting themselves and it just happens to be that corrections are always rough to most people, and highly profitable to a few. Ex. the 2009 housing bubble in the US. A few people made a ton of money of this. Same with gold coming off its all time highs.
honksillet 12y ago
Here is the take away. "As it turns out, Margaret Thatcher was right..."
ryandrake 12y ago
Bank of England thought they could achieve the Impossible Trinity [1] and failed: 1. http://en.wikipedia.org/wiki/Impossible_trinity http://en.wikipedia.org/wiki/Impossible_trinity
rurounijones 12y ago
So it seems that everyone knew the pound was mis-valued, the only thing stopping them from just revaluing was politics and the egos of politicians. They were a bleeding man in water and Soros was a shark; I don't praise or like him for what he did but he was not the main cause, he just acts as you would have expected him to.
phkahler 12y ago
So what is the play today? The US is backed into a corner. Interest rates are near zero (Fed fund rate) and they're buying $75Billion in bonds a month to keep interest rates low. That was $85B and was supposed to taper, but as soon as they dropped a little bit mortgage rates rose and home sales dropped again - the housing market is at another peak with the low interest rates with nowhere to go but down. They keep hoping to get some inflation going by pushing on that rope and it's just not happening. All the money is going into stocks. If we do get significant inflation they'll have to raise rates and destroy the housing market (worse than last time). So we're on the brink. It's hard to short stocks when they're rising so fast - one who could time this thing could make Soros' gain look like lunch money. What is the play?
- kasey_junk 12y ago
  One thing to remember is that the Soros bet was available because the currency was pegged. Everyone (in the west) has learned that to be a bad thing, in part because of this particular bet. The US has not pegged their currency. They've made other currency policy decisions under the hope that the US currency can handle the debasement (and so far they have proven true). Remember that when you short a currency, you also are taking a position about all the other currencies in the world. So rather than say you don't like US dollars you need to say, I prefer X to US dollars and think they aren't currently trading at the right ratio (and if you are shorting you have to account for a very expensive transaction cost). So rather than asking what the play against the US dollar is, ask which currency you prefer. The international markets do this everyday and so far they haven't found a very compelling alternative.
- pistle 12y ago
  Their gamble was also time-based. This shift was imminent. No such thing is nearly as critical today. You can be edging into such a play, but having all the stars align - being in the right place with the right amount of capital leverage, and sitting at the precipice of an actionable event happens maybe once every 10-20 years. You can be right about the problem, but being able to enter and exit a market to benefit from such prescience requires a lot of timing. If the wreck is slow motion, you can lost most of the utility of your insight by transaction fees, interest, and the contrarian, emotional whims of the market you play in. It's better to have other peoples' money at your disposal. Hedge fund managers are in a great spot.
duncan_bayne 12y ago
"As it turns out, Margaret Thatcher was right: the UK had no business trying to artificially prop up its currency in an era when a handful of hedge funds could assemble more capital in a few hours than the Bank of England had at its disposal." Unfortunately, power-lust and ideology usually trump reason when politicians are involved.
bsaul 12y ago
I wonder how much money soros fans lost when they tried to do the same in the previous years, trying to speculate on the end of the euro. I love the paragraph saying "there was no way the sterling would go up". Those are really the kind of reasonning you can do 20 years later. You never know that there really "is no chance".
- ZenPro 12y ago
  I personally lost a little over 9 months salary. The missus was not pleased :-) To be honest, the entire gambit rested on the results of the Greek election [1]. If Tsiparis (Syriza) had of won then everyone who shorted would have made a killing as they pledged to cease any repayments. Exit polls had them possibly winning at 7pm with the possibility lessened by 05.% at 8pm. As it happened, the result was 26.9% to Syrizas and the winners (ND/DISY) with 29.7%; the markets already started climbing that evening and within a few days the majority of short positions were untenable incurring substantial losses. Most media outlets agreed that a Tsiparis win would have resulted in a Greece exit from the Eurozone with the currency plummeting. Foreign Affairs stated that ...the election determined whether Greece would exit the eurozone and decide the fate of the entire postwar European project. [2] The entire issue came down to just 170,475 votes (>2% of the voting population). [1] http://en.wikipedia.org/wiki/Greek_legislative_election,_June_2012 http://en.wikipedia.org/wiki/Greek_legislative_election,_Jun... [2]http://www.foreignaffairs.com/articles/137710/stathis-n-kalyvas/greece-votes-itself-in-the-foot http://www.foreignaffairs.com/articles/137710/stathis-n-kaly...
  - bsaul 12y ago
    Because you think that it's up to a greek political party to endanger the whole eurozone ? Even if they had won, them leaving was really less than certain. Most political parties tend to change a lot once they actually have to take the decisions, and believe me, in that case there were a lot of things other euro countries could have done to prevent any kind of greek disastrous initiative.
    - ZenPro 12y ago
seanccox 12y ago
It's interesting timing to post this, since the New Yorker explored the data available on hedge funds' returns just yesterday, and found them lacking... http://www.newyorker.com/online/blogs/johncassidy/2014/05/how-hedge-funds-get-away-with-it.html http://www.newyorker.com/online/blogs/johncassidy/2014/05/ho...
Vanayad 12y ago
I am really curious what would have happened if the British Government bought DM as well during this period (and maybe not disclose it?) Then they would exit the ERM, and the pound would fall and they would exchange all their money back to sterling and would be rich... :/ I know my logic has a mistake in it... it can't be that simple :P
- contulluipeste 12y ago
  The British Government had DMs, that's what they sold trying to keep their currency at fixed rate. You say they should have kept Deutschmarks to sell them later for what? For depreciated sterling pounds? It doesn't make sense, the only thing that a government has plenty of is its own currency. Governments are "rich" in their own printed stamps, the challenge is to keep those stamps valuable. That's what the British Government was trying to do.
facepalm 12y ago
One aspect in stories of this kind always seems to be somebody trying to artificially inflating the value of some stock (or currency) by buying lots and lots of it. In this case, the bank of England. (I've read the same thing about Indonesia, and the Barings Bank incident). That seems so silly - I mean here are these supposedly highly trained financial experts, and all they can do is try the most primitive stock manipulation imaginable? What would have happened if the Bank of England wouldn't have tried to artificially inflate the pound by buying lots of it? Would it have had the same cost to the tax payer? Obviously there would have been a cost because of the devalued pound (less buying power for foreign goods), so perhaps the question is did it even make any difference? Either they lose because of the diminished buying power, or they lose directly because of the buying spree of the Bank of England?
- lmm 12y ago
  The thing is that you only see the failures. Propping up a currency like that works fine until it doesn't. Not buying up pounds would have meant dropping out of the ERM immediately. In the short term that would have saved money. In the long term, depends on your view of how similar or different the UK and German economies are.
jokoon 12y ago
world finance is brutal
arbuge 12y ago
That's a previous century. This century's trade of the century so far might be John Paulson shorting various mortgage securities during the financial crisis.
blueskin_ 12y ago
Yet again, Thatcher showed her intelligence and foresight by opposing the ERM. There's a reason many people in Britain referred to it as the Eternal Recession Mechanism. It is a shame bordering on a national disgrace that so many people don't know of actions like that, or indeed, her being one of the biggest proponents of lean-burn technology that would yield several times the fuel efficiency of modern cars but has since been all but abandoned[1]. She saw climate change as a future issue before any other politician, but was unable to act given the conditions of the time. Instead, she is best remembered for the collapse of the coal industry, something that was inevitable in any case, but she simply refused to subsidise it to keep it staggering along for another couple of years. Not only this, but she was responsible for Britain winning one of the few post-WW2 wars fought by the West against anything close to an equally well equipped foreign power. [1]http://iaindale.blogspot.co.uk/2009/02/margaret-thatcher-climate-change.html http://iaindale.blogspot.co.uk/2009/02/margaret-thatcher-cli... http://conceptual-reflections.w43w.com/1036/unleaded-painting-a-false-picture/ http://conceptual-reflections.w43w.com/1036/unleaded-paintin...
- kasey_junk 12y ago
  Without getting into the pluses/minuses of Thatcher's leadership, saying that she "simply refused to subsidise" the coal industry papers over a lot of very anti union activities. You can argue for or against these activities, but the reason she is despised so widely has nothing to do with subsidies and everything to do with criminalizing non-violent Union protests.
kyleblarson 12y ago
Funny that he now uses profits derived from the incompetence of one government to purchase elections in another.
alexnewman 12y ago
Hardly the trade of the 1900's. In fact Soros has had much better deals. Also, on the notion that the pound was inherintly broken, one should probably checkout adam curtis mayfair set.

238 points by nols 12y ago

I'm interested to hear people's reactions to the article and the Soros trade. I'd also like to know what the HN crowd thinks about opinions like this recent New Yorker article that asks how hedge funds "get away" with charging such high fees without producing superior returns: http://www.newyorker.com/online/blogs/johncassidy/2014/05/how-hedge-funds-get-away-with-it.html http://www.newyorker.com/online/blogs/johncassidy/2014/05/ho...

wslh 12y ago
How do you connect these articles? The Soros funds gave high returns along their life.
Tycho 12y ago
One reason the article didn't mention is that investors want their portfolio managers to be highly incentivised. If a hedge fund manager is paid 2% of the AUM after growth and 20% of the profits each year, then they have a golden opportunity. Incentives for traditional mutual fund management are not as exciting and to the investor, the actual performance is almost an afterthought compared to the initial asset allocation decision.
- makomk 12y ago
  The trouble is, assuming that returns are essentially random and that hedge fund managers cannot beat the market except through luck - which seems to be more or less true - it doesn't matter how much you incentivise them. Giving them a bigger cut of the profits just means you come out worse on average. Now, it's certainly in the interest of hedge fund managers to convince investors that giving the managers a bigger cut is in the investors' interest, but that doesn't make it true.
  - Tycho 12y ago
    But if you truly believed that returns are random then you definitely wouldn't be investing in a hedge fund anyway, so I'd say that's a moot point.
melling 12y ago
Sounds like Soros has produced superior returns. http://www.news.com.au/finance/markets/george-soros-quantum-endowment-fund-makes-55-billion-in-2013-most-successful-in-history/story-e6frfm30-1226823459957 http://www.news.com.au/finance/markets/george-soros-quantum-...
- orbifold 12y ago
  Probably either insider information or selection bias.
cdk 12y ago
I believe the 20% cut that the manager make is after they clear a benchmark like the S&P 500 to ensure they get paid when they produce a superior return compared to what an index fund could deliver.
- patio11 12y ago
  This is not a very meaningful hurdle, though. For example, let me pitch you on the Patio11 Hedgehog Fund. It uses complicated financial alchemy to produce market-beating returns, and you only pay if we beat the market. The fund has never lost money. Care to invest $10 million? You pay 2% per year and 20% of returns above the S&P 500. Hypothetically suppose the S&P is up 10% next year. I deliver 20% returns. Alchemy, what can I say. You make $1.6 million, I make $0.4 million (from you), and since I did this in parallel with 100 other people life is pretty grand for me. Now just between HN and me, my strategy is simple: I buy the S&P 500 as an index but I use 2X leverage. What would have happened if the market went down 5% next year? Well, we would have lost 10%. That certainly sucks, and you need to make your $1 million back. Which is great, because I am now accepting new money on the Patio11 Chinchilla Fund. It uses complicated financial alchemy to produce market-beating returns, and you only pay if we beat the market. The fund has never lost money.
  - kasey_junk 12y ago
    Well to be fair, it's also not the real hurdle than any investor in Hedge funds use. It's more of a marketing term than anything else (and often funds don't target the S&P as their benchmark, but something else closer to their trade category). Almost all investors in hedge funds will want to see the portfolio of all previous funds you've managed as well as how much of your own money you have in the fund, how much leverage you are doing, alpha, beta, risk adjusted metrics etc. That said, the Hedge Fund industry is going through a consolidation. Lots of small funds were essentially S&P indexes with leverage/hedges and execution ability. The rise of ETFs, the decrease in execution costs, and the creation of a true history of performance has made those funds pretty obviously useless and they are (rightly, I believe) dying.

truantbuick 12y ago

I don't know that much about finance, so can somebody explain to me why I never hear anybody censuring Soros over this? I only hear congratulations for bamboozling the incompetent British government. He made billions at the expense of an entire country. I'm not saying it was illegal, and maybe people like Soros are needed to help deter governments from artificially manipulating their currency like the British did. However, when it comes down to it, he benefited by executing a bet meant to enrich himself, compound the problems of the pound, and diminish the wealth of a nation. It seems like a plainly immoral thing to me.

ProAm 12y ago
He played the game according to the rules. You can't fault a winner when he wins on a even playing field.
- AndrewBissell 12y ago
  In fact, Soros won on a playing field tilted against him. He went up against a sovereign country with taxing power, and won.
- truantbuick 12y ago
  Using these kind of game metaphors just shallowly rationalizes something of far more importance, IMO. Legal or not, a country was worse off because of his direct and deliberate actions.
  - AndrewBissell 12y ago
    No, the country was worse off because of its government's decision to prop up the currency in an unsustainable way. Soros just happened to be the instrument by which the market finally clobbered England over the head. It could have been some other speculator or group of speculators, and it could have played out over a longer time period (possibly at even greater loss to the British public), but it would have happened sooner or later.
  - justin66 12y ago

seizethecheese 12y ago

It's interesting that the loss to the Bank of England is attributed almost entirely to Soros. If you accept that the fixed rate was unsustainable then even without Soros the Bank of England would have been forced to defend an untenable position, and eventually would have lost enough to give up. It's reasonable to assume that the acceptable losses for the Bank of England would have been similar whether they were sustained in one day or over the period of weeks or months. Soros' brilliance was to see the inevitable and take almost the entire opportunity for himself.

the_watcher 12y ago
I wouldn't call myself a Soros fan, but I don't think people generally blame him (alone, at least). Most people I've heard from on this recognize the gross incompetence of those running the Bank of England, and the biggest problem anyone has with Soros is on moral grounds more than anything (exploiting incompetence to essentially take money from British taxpayers without providing them anything in return).
- seizethecheese 12y ago
  The article's first sentence: > In 1992, George Soros brought the Bank of England to its knees. You're right that many well-informed people don't blame Soros alone, but the sentence above pretty well encapsulates the mythology surrounding this story. It would be more accurate to say: "the day George Soros hastened the collapse of the ERM."
marvin 12y ago
The big question is whether the Bank of England would have sold so much GBP if this was allowed to happen gradually rather than overnight. The real problem is still political incompetence, but there's no guarantee that the losses of the British taxpayers would have been equally large if Soros's fund had not made such a spectacular short which sparked a political pissing match.
- seizethecheese 12y ago

mikecb 12y ago

| 2.78 DM to 3.13 GBP. I think they mean between 2.78 and 3.13 DM per GBP.

AndrewBissell 12y ago

Politicians always like to blame speculators when their attempts to fight the market inevitably end in failure, and this instance is no different. Soros didn't "break the GBP," it was already broken and the British government's guarantee to prop it up was never sustainable in the first place. Someone was going to a lot of make money when the British government's scheme unraveled. Soros just happened to make a lot more than anyone else. Reminds me of a good Rhett Butler quote: "Opportunists have always been held in disrepute. Especially by those who had the same opportunities and didn't take them."

PhasmaFelis 12y ago
It was going to happen anyway, so there's nothing wrong with benefiting from it, yes? If a man with diamond cufflinks and a fat wallet is passed-out drunk on the sidewalk at midnight in a bad neighborhood, he is definitely going to get robbed. Does that mean I should go ahead and rob him myself with a clear conscience? I guess, according to you and Rhett Butler, I'm just jealous because I didn't pickpocket the last drunk I met.
- CocaKoala 12y ago
  Well, no. Robbing a passed out drunk is a crime; you should feel bad for committing crimes, even if it's clear that if you didn't somebody else would. Shorting a stock (or a currency) is not a crime; it's an acceptable thing to do in a market.
  - PhasmaFelis 12y ago
    I was under the impression that we frown on screwing innocent people because it's a shitty thing to do, not because it happens to be designated as a crime. I'm not saying that what Soros did should be illegal, mainly because overregulation can wind up screwing innocent people in all sorts of different ways that I'm not wise enough to predict. But I surely don't understand why he's being held up for praise.
    - 12y ago

PhasmaFelis 12y ago

Why is it that taking advantage of loopholes and incompetent bureaucracy to take things from innocent people is monstrous if you do it on a small scale, but heroic on a national scale?

AndrewBissell 12y ago
Why is it no one ever puts the blame on the incompetent bureaucracies that are actually responsible for losing their countries' money?
- PhasmaFelis 12y ago
  Don't you think there's plenty of blame for everybody? If I leave my keys in the ignition with the window down and my car gets stolen, it's my own fault for being careless, but that doesn't mean the thief is innocent.
  - kansface 12y ago
    There was neither a thief nor a theft. The equivalent would be if you declared you would attempt to fix the price of all Camrys. You buy a huge number of them to prop up the price. Some third party thinks this is stupid, borrows some Camrys and sells them for dollars. Eventually you run out of money and the price falls. There is no theft- it was simply a bad position for you to take in the first place. Baring any ethics, should governments be immune from loses in open markets? Who would participate?
    - zacinbusiness 12y ago
      An elite few wealthy politicians decided how millions of people's money would act in the global economy. They made a bad call, obviously. But Soros and company weren't forced to "go for the jugular." They could have effectively "taught the British government a lesson" by making a few hundred million dollars and leaving the currency in tact, rather than completely decimating it. It's just greed. And the fact that so few people can see that is alarming.

temuze 12y ago

Can someone explain to me what the effects of China's artificial devaluation of the yuan vs the dollar are? I understand that they are doing this to make themselves more competitive as an export economy, but can they really keep it up? I mean, to maintain this valuation, they have to constantly sell yuan and buy dollars, but they can't do that forever, right? So when the yuan finally increases in value, will the dollar's value crash?

klodolph 12y ago
Maybe the dollar's value will crash relative to the Yuan. If you make a bet like George Soros that the Yuan is going to rise in value, what would that bet look like? One of the problems with the bet is that you are betting in the opposite direction from Soros. China can just print more Yuan, and suddenly Yuan decrease in value. Add to this the ridiculous levels of pointless internal investments, seemingly done to inflate China's GDP. And finally, there are severe problems with Chinese equity markets that make it scary to bet on Yuan against USD. I think at some point in the future, China will stop having an export economy, because advances in manufacturing technology and automation will obviate the need for cheap labor. And at some other point, China will start investing sensibly in internal matters. I have no idea how to translate this into USD or CNY, but if I were in China, I would want the transition to happen gradually. A gradual transition avoids destroying the manufacturing sector overnight.
- cinquemb 12y ago
  I don't know if this is related directly, but seeing as Soros is in on the largest gold mining company in the world and other gold companies related etf's[0], doesn't that speak somewhat to the type of bet he's making in this landscape? [0]: http://www.reuters.com/article/2014/05/15/hedgefunds-filings-gold-idUSL1N0O127W20140515 http://www.reuters.com/article/2014/05/15/hedgefunds-filings...
  - zacinbusiness 12y ago
    Very good observation.

the_watcher 12y ago

So this is basically the worst case scenario of activist monetary policy by governments, right?

emiliobumachar 12y ago
Wrong. Worst case scenario, they'd double down and keep fighting the market until the country was completely bankrupt.

pjc50 12y ago

In some ways, this was a comparatively cheap way for the UK to discover that fixed exchange rates between economies must force the pressure into current account deficits instead; such as has happened to Portugal/Ireland/Greece/Spain. Falling out of ERM kept the UK out of the Euro, which was beneficial in the long run.

M2Ys4U 12y ago
>Falling out of ERM kept the UK out of the Euro, which was beneficial in the long run. Perhaps. That's certainly conventional wisdom, but we have no way of knowing what the political or economical landscape would have been if the UK stayed in the ERM and was now in the Eurozone. 20+ years is a long time.
- TazeTSchnitzel 12y ago
  Were it not for Brown, we might have joined the Euro.
claudius 12y ago
The PIGS countries would be much worse off outside the eurozone than inside, to see this, just compare the recent economical dips to the massive increase in activity following the introduction of the Euro in 2002. And to say that a country without any industry is even remotely in a good position (implied by “beneficial in the long run”) is a rather curious thing, too.
- pjc50 12y ago
  country without any industry This description does not match the UK, no matter how many "manufacturing is dead" articles you read in the papers.

loso 12y ago

A pretty good documentary from the BBC about Black Wednesday. Shows more from the government side and the mistakes they made than Soros part but still gives you a good understanding of what happened. http://m.youtube.com/watch?v=K_oET45GzMI http://m.youtube.com/watch?v=K_oET45GzMI

westiseast 12y ago

If you see an online service whose online security is terrible, do you (a) notify the company (b) hack them and privately inform them off the exploit or (c) hack them, steal all the data, sell it on the open market and make a million pounds, simultaneously disadvantaging millions of average customers?

AndrewBissell 12y ago
LOL, I can just imagine the scene now: INTERIOR, HER MAJESTY'S TREASURY OFFICE PHONE RINGS SOROS: Hi, my name is George Soros, I'm a hedge fund manager and international speculator. I noticed that you're trying to prop up the British pound, but rather than try to profit from this, I figured I'd just call and give you guys the heads up that it's not going to work. TREASURY OFFICIAL: Oh my God, you're right! We'll issue a public statement right away, admitting that we've been wrong and that we're putting an immediate end to the policy. Thanks so much for the warning, kind sir!
- westiseast 12y ago
  Hahaha, they'd just say sorry a thousand times the mutter something about immigrants.
- fabulist 12y ago
  "In light of this development, we're starting a Fiscal Policy Bug Bounty program...."
CocaKoala 12y ago
A better comparison would be: You find an online blackjack service that uses pRNGs, and can reverse the state of their decks in real time. Do you (a) notify the company or (b) play a bunch of blackjack and clean out the house? George Soros didn't hack anything or steal anything; he made use of publicly accessible information to make a gamble and he won big. The consequences of that win were certainly crummy for a whole bunch of people and it's terrible that a lot of innocent people were put in that position, but to compare Soros to a criminal is pretty disingenuous.

deleted 12y ago

[deleted]

coreymgilmore 12y ago

Free markets always win. The markets have a very good history of correcting themselves and it just happens to be that corrections are always rough to most people, and highly profitable to a few. Ex. the 2009 housing bubble in the US. A few people made a ton of money of this. Same with gold coming off its all time highs.

honksillet 12y ago

Here is the take away. "As it turns out, Margaret Thatcher was right..."

ryandrake 12y ago

Bank of England thought they could achieve the Impossible Trinity [1] and failed: 1. http://en.wikipedia.org/wiki/Impossible_trinity http://en.wikipedia.org/wiki/Impossible_trinity

rurounijones 12y ago

So it seems that everyone knew the pound was mis-valued, the only thing stopping them from just revaluing was politics and the egos of politicians. They were a bleeding man in water and Soros was a shark; I don't praise or like him for what he did but he was not the main cause, he just acts as you would have expected him to.

phkahler 12y ago

So what is the play today? The US is backed into a corner. Interest rates are near zero (Fed fund rate) and they're buying $75Billion in bonds a month to keep interest rates low. That was $85B and was supposed to taper, but as soon as they dropped a little bit mortgage rates rose and home sales dropped again - the housing market is at another peak with the low interest rates with nowhere to go but down. They keep hoping to get some inflation going by pushing on that rope and it's just not happening. All the money is going into stocks. If we do get significant inflation they'll have to raise rates and destroy the housing market (worse than last time). So we're on the brink. It's hard to short stocks when they're rising so fast - one who could time this thing could make Soros' gain look like lunch money. What is the play?

kasey_junk 12y ago
One thing to remember is that the Soros bet was available because the currency was pegged. Everyone (in the west) has learned that to be a bad thing, in part because of this particular bet. The US has not pegged their currency. They've made other currency policy decisions under the hope that the US currency can handle the debasement (and so far they have proven true). Remember that when you short a currency, you also are taking a position about all the other currencies in the world. So rather than say you don't like US dollars you need to say, I prefer X to US dollars and think they aren't currently trading at the right ratio (and if you are shorting you have to account for a very expensive transaction cost). So rather than asking what the play against the US dollar is, ask which currency you prefer. The international markets do this everyday and so far they haven't found a very compelling alternative.
pistle 12y ago
Their gamble was also time-based. This shift was imminent. No such thing is nearly as critical today. You can be edging into such a play, but having all the stars align - being in the right place with the right amount of capital leverage, and sitting at the precipice of an actionable event happens maybe once every 10-20 years. You can be right about the problem, but being able to enter and exit a market to benefit from such prescience requires a lot of timing. If the wreck is slow motion, you can lost most of the utility of your insight by transaction fees, interest, and the contrarian, emotional whims of the market you play in. It's better to have other peoples' money at your disposal. Hedge fund managers are in a great spot.

duncan_bayne 12y ago

"As it turns out, Margaret Thatcher was right: the UK had no business trying to artificially prop up its currency in an era when a handful of hedge funds could assemble more capital in a few hours than the Bank of England had at its disposal." Unfortunately, power-lust and ideology usually trump reason when politicians are involved.

bsaul 12y ago

I wonder how much money soros fans lost when they tried to do the same in the previous years, trying to speculate on the end of the euro. I love the paragraph saying "there was no way the sterling would go up". Those are really the kind of reasonning you can do 20 years later. You never know that there really "is no chance".

ZenPro 12y ago
I personally lost a little over 9 months salary. The missus was not pleased :-) To be honest, the entire gambit rested on the results of the Greek election [1]. If Tsiparis (Syriza) had of won then everyone who shorted would have made a killing as they pledged to cease any repayments. Exit polls had them possibly winning at 7pm with the possibility lessened by 05.% at 8pm. As it happened, the result was 26.9% to Syrizas and the winners (ND/DISY) with 29.7%; the markets already started climbing that evening and within a few days the majority of short positions were untenable incurring substantial losses. Most media outlets agreed that a Tsiparis win would have resulted in a Greece exit from the Eurozone with the currency plummeting. Foreign Affairs stated that ...the election determined whether Greece would exit the eurozone and decide the fate of the entire postwar European project. [2] The entire issue came down to just 170,475 votes (>2% of the voting population). [1] http://en.wikipedia.org/wiki/Greek_legislative_election,_June_2012 http://en.wikipedia.org/wiki/Greek_legislative_election,_Jun... [2]http://www.foreignaffairs.com/articles/137710/stathis-n-kalyvas/greece-votes-itself-in-the-foot http://www.foreignaffairs.com/articles/137710/stathis-n-kaly...
- bsaul 12y ago
  Because you think that it's up to a greek political party to endanger the whole eurozone ? Even if they had won, them leaving was really less than certain. Most political parties tend to change a lot once they actually have to take the decisions, and believe me, in that case there were a lot of things other euro countries could have done to prevent any kind of greek disastrous initiative.
  - ZenPro 12y ago

seanccox 12y ago

It's interesting timing to post this, since the New Yorker explored the data available on hedge funds' returns just yesterday, and found them lacking... http://www.newyorker.com/online/blogs/johncassidy/2014/05/how-hedge-funds-get-away-with-it.html http://www.newyorker.com/online/blogs/johncassidy/2014/05/ho...

Vanayad 12y ago

I am really curious what would have happened if the British Government bought DM as well during this period (and maybe not disclose it?) Then they would exit the ERM, and the pound would fall and they would exchange all their money back to sterling and would be rich... :/ I know my logic has a mistake in it... it can't be that simple :P

contulluipeste 12y ago
The British Government had DMs, that's what they sold trying to keep their currency at fixed rate. You say they should have kept Deutschmarks to sell them later for what? For depreciated sterling pounds? It doesn't make sense, the only thing that a government has plenty of is its own currency. Governments are "rich" in their own printed stamps, the challenge is to keep those stamps valuable. That's what the British Government was trying to do.

facepalm 12y ago

One aspect in stories of this kind always seems to be somebody trying to artificially inflating the value of some stock (or currency) by buying lots and lots of it. In this case, the bank of England. (I've read the same thing about Indonesia, and the Barings Bank incident). That seems so silly - I mean here are these supposedly highly trained financial experts, and all they can do is try the most primitive stock manipulation imaginable? What would have happened if the Bank of England wouldn't have tried to artificially inflate the pound by buying lots of it? Would it have had the same cost to the tax payer? Obviously there would have been a cost because of the devalued pound (less buying power for foreign goods), so perhaps the question is did it even make any difference? Either they lose because of the diminished buying power, or they lose directly because of the buying spree of the Bank of England?

lmm 12y ago
The thing is that you only see the failures. Propping up a currency like that works fine until it doesn't. Not buying up pounds would have meant dropping out of the ERM immediately. In the short term that would have saved money. In the long term, depends on your view of how similar or different the UK and German economies are.

jokoon 12y ago

world finance is brutal

arbuge 12y ago

That's a previous century. This century's trade of the century so far might be John Paulson shorting various mortgage securities during the financial crisis.

blueskin_ 12y ago

Yet again, Thatcher showed her intelligence and foresight by opposing the ERM. There's a reason many people in Britain referred to it as the Eternal Recession Mechanism. It is a shame bordering on a national disgrace that so many people don't know of actions like that, or indeed, her being one of the biggest proponents of lean-burn technology that would yield several times the fuel efficiency of modern cars but has since been all but abandoned[1]. She saw climate change as a future issue before any other politician, but was unable to act given the conditions of the time. Instead, she is best remembered for the collapse of the coal industry, something that was inevitable in any case, but she simply refused to subsidise it to keep it staggering along for another couple of years. Not only this, but she was responsible for Britain winning one of the few post-WW2 wars fought by the West against anything close to an equally well equipped foreign power. [1]http://iaindale.blogspot.co.uk/2009/02/margaret-thatcher-climate-change.html http://iaindale.blogspot.co.uk/2009/02/margaret-thatcher-cli... http://conceptual-reflections.w43w.com/1036/unleaded-painting-a-false-picture/ http://conceptual-reflections.w43w.com/1036/unleaded-paintin...

kasey_junk 12y ago
Without getting into the pluses/minuses of Thatcher's leadership, saying that she "simply refused to subsidise" the coal industry papers over a lot of very anti union activities. You can argue for or against these activities, but the reason she is despised so widely has nothing to do with subsidies and everything to do with criminalizing non-violent Union protests.

kyleblarson 12y ago

Funny that he now uses profits derived from the incompetence of one government to purchase elections in another.

alexnewman 12y ago

Hardly the trade of the 1900's. In fact Soros has had much better deals. Also, on the notion that the pound was inherintly broken, one should probably checkout adam curtis mayfair set.