George Soros is one of the most (in)famous figures in the world of finance. Known as ‘the man who broke the Bank of England’, thanks to his $10 billion bet against the British pound in 1992, Soros is one of the most successful hedge fund managers ever. While at the helm of the Quantum Fund (founded by Soros and Jim Rogers in the 70s), he generated an average annual return for investors of 30%.
In this ten-part series, I’m going to be looking at the life of George Soros, how his career started on Wall Street, his most profitable trades, his favoured style of investing and life after the Quantum Fund. While Soros initially built his reputation with his trading acumen, since his retirement has become increasingly active in the political world as well as being a benevolent (or controversial) philanthropist. His actions in the political arena will also form part of the series, although for the most part, the series will concentrate on Soros’ life and career in the financial markets.
George Soros part one: Early career
There are few if any other investors out there that can claim to have achieved returns that come close to those of George Soros’ Quantum Fund. Founded in 1969 with seed capital of $4 million, including $250,000 of Soros’ own money, the Quantum fund originally began life as the Double Eagle hedge fund, an offshoot of an offshore investment fund called First Eagle.
First Eagle was owned and managed by New York-based investment bank Arnhold and S. Bleichroeder. Soros joined the firm in 1963 and over the next three years rose to become vice president, where his success prompted the firm to contribute $100,000 to start Soros’ own investment vehicle. This is where First Eagle was born. Three years later during 1969 after the success of the first fund, Double Eagle was created to further capitalise on Soros’ investment ingenuity.
Unfortunately, the success at Arnhold and S. Bleichroeder didn’t continue for much longer. Federal regulations on conflicts of interests began to hinder the operations of the firm and as a result, Soros decided to quit to start his own business with the Double Eagle Fund.
In 1973 the Double Eagle Fund was renamed the Soros Fund and George Soros joined forces with Jim Rogers. With $12 million in assets to play with, the duo began their record-breaking streak of returns. Over the years, the two men would reinvest their returns from the fund, along with significant portions of their annual 20% management fees.
No fund has come close to producing the returns that the Soros fund managed during the three decades between 1970 and 2000. A $1,000 investment with Soros in 1969 would have grown to $4 million by the year 2000, an annual growth rate of 30%.
At the Quantum Fund Soros deployed his own way of thinking about the markets. The cornerstone of his strategy is the “reflexivity” theory. This theory is a unique method. Simply put, the reflexivity method values assets by relying on other market feedback to gauge how the rest of the market is valuing assets. On top of this Soros also makes use of his political acumen to gauge political risks in the macroeconomic environment. And on top of these two traits Soros applies a scientific method to create a strategy that tracks what will transpire in the financial markets, based on current market data. All in all, Soros’ investment strategy is well developed and almost impossible to replicate using a figures or formula based approach.
Soros began to develop his investment acumen and bespoke way of thinking about the financial markets relatively early in his life.
Developing the strategy
George Soros was born in Budapest, Hungary in 1930. In the mid-40s he fled the Nazis and found his way to England where he began to rebuild his life. Upon arriving in London Soros found a place to stay at the Esperanto Society and went on to roll in the London School of Economics in 1947. As he arrived in England virtually penniless, throughout this time Soros had to make whatever he could by working as a waiter and a railway porter throughout his time at the LSE. However, while at the school Soros was able to study under one of the greatest philosophers of science of the 20th century, Karl Popper originator of the term "open society." It’s this early encounter with philosophy and economics that helped Soros begin to formulate his “reflexivity” theory. Soros graduated from the LSE in 1951 with a bachelor of science in philosophy. He then chose to stay on three more years to complete his doctorate and finally finished university in 1954.
Karl Popper’s teachings have played an enormous part in Soros’ career. Karl Popper. Soros’ concept was that self-awareness is part of any given environment, which implies that the act of creating a valuation in any market would necessarily be reflected in the actions of market participants, creating a virtuous or vicious cycle within the market. What’s more, self-awareness could alter how financial actors behave when they have access to or knowledge of an individual prediction. Self-awareness could make a false statement become true or vice versa. With this rough interpretation of “reflexivity,” Soros had the edge over many of his peers in the financial sector, an edge which has enabled him to climb quickly to the top of the industry.
After university armed only with his philosophy degree, Soros set out to find work, but few wanted to hire him. As he needed the money, he worked as a travelling salesman along the Welsh coast while trying to make contact with managing directors at merchant banks across London. Most ignored Soros’ pleas for work but one a fellow Hungarian, a managing director at Singer & Friedlander decided to take a gamble on the young man and offered Soros an entry-level position.
Soros started work at the bank as a clerk but was soon promoted to the arbitrage department. His skill quickly caught the attention of colleagues and one of them soon recommended Soros for a position at his father’s brokerage house, F.M. Mayer in New York. Soros accepted the position and moved to New York in 1956. He specialised in European stocks at a time when the foundations of the European Union were beginning to form. His knowledge of European equities and their strengths led him to another position Wertheim & Co. in 1959 as an analyst of European securities.
During his time as an analyst in both New York and London, Soros was busy developing his market strategy and saving funds for the future. His initial plan was to save $500,000, head back to England and study philosophy for the rest of his life but instead of returning to London Soros continue to