George 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%.

George Soros Quantum Fund
Photo by Norway UN (New York)

Across this ten-part series, I’m taking a look at Soros’ life, trading career, and political involvements.  In the first three parts of this series, which can be found at the links below, I covered the beginnings of Soros’ Quantum Fund, Soros’ trades against the Bank of Thailand and possibly Soros’ most famous trade against the British pound in 1992.

This part is devoted to two more of Soros’ most memorable trades.

George Soros Part Four: The yen and the bear

George Soros’ public hedge fund career lasted more than four decades. In 2011 the billionaire returned the remainder of the money invested with him to outside investors, ending his career as a hedge fund manager. The value of outside assets still managed by Soros at this time had fallen to less than $1 billion, although the office still managed more than $25 billion all of which was Soros family wealth.

Even though Soros technically ended his career as a public hedge fund manager in 2011, the billionaire trader has continued to place large directional bets on currencies and commodities since his official retirement. These trades have not received as much attention as those placed earlier in his career, but they show Soros hasn’t lost his touch when it comes to trading.

The most significant of these post-Quantum Fund bets was against the Japanese yen in 2013 and 2014. Soros knew that Japan’s Prime Minister Shinzo Abe was engaging in extensive monetary easing, in an attempt to jumpstart Japan’s languishing economy and just as he did against the Bank of Thailand a decade earlier, and the Bank of England in 1992, Soros placed a large bet that the value of the yen would weaken as Shinzo launched his Abenomics policies.

The policies proved to be immediately effective, although they’ve since lost their effectiveness during the past few years. The value of the yen fell while Japan’s equity markets rallied. In theory, a weak yen should boost exports which would increase profits of leading Japanese companies. What’s more, with Abe seemingly set on doing whatever it takes to boost Japan’s economic growth, international investors clamored to get their hands on Japanese equities to profit from Japan’s resurgence.

 

 

Central Bank Experimental Economics Central Bank Experimental Economics Michael Pettis buffett vs soros w uncle samShort yen long Nikkei

Soros was short the yen and long the Nikkei when Abenomics began, and this trade paid off handsomely. The yen weakened around 17% during the time of Soros’ wager, while the Japanese stock market rallied around 28% before eventually selling off. It is believed the fund made a profit of $1 billion from this event. The Soros family investment fund returned approximately 10% during 2013 – that works out at $2.4 billion as the fund had $24 billion under management at the beginning of the year.

Other trades since 2011 haven’t worked out as well for the Soros family office. According to the Wall Street Journal, George Soros, was betting against the Swiss franc in the fall before the Swiss National Bank decided to abandon the Swiss franc’s peg to the euro at the beginning of 2015. If Soros had remained long, he would have suffered massive losses like the majority of the wider financial sector following the SNB’s decision. According to the WSJ, Soros exited the trade after “viewing the risk as too high relative to potential gains.

Reading through the trading history of George Soros it’s easy to reach the conclusion that the billionaire can do no wrong in the markets. But George Soros is still human and still makes mistakes. One such mistake was his acquisition of Bear Stearns stock at $54 a share on March 14, 2008.

Recounting his trade in the book “The New Paradigm for Financial Markets,” Soros writes that he was entirely sure Bear was for sale, as the institution could no longer afford to survive by itself. However, Soros had little inside knowledge about the bank and didn’t realize the extent of the damage to the bank’s books by trading arm losses.

Soros was right about the takeover, but he wasn’t right about the price. Two days after Soros brought Bear at $52 on March 16, 2008, Bear Stearns signed a merger agreement with JP Morgan Chase. The acquisition price was $2 a share, a loss of 96.2% for the Soros office.

How to trade like Soros

First off, it aint easy or even possible (especially to describe in a few paragraphs but) here we go!

 

In the first part of this series, there is a brief roundup of the trading strategy Soros used over the years. The trades above and those in the previous two parts are excellent examples of the way Soros put his trading strategy to work over the years.

The billionaire placed his trades using a combination of economic and psychological information. In the most significant deals of his career, Soros was betting on the stupidity of central banks and the price discovery mechanism of financial markets. With the Bank of England, Bank of Thailand and Bank of Japan Soros correctly calculated how markets would react to central bank actions and put on trades that were almost risk-free as the calculated upside was many multiples of the potential downside.

Understanding the nature of financial markets is the root of Soros’ strategy. Markets don’t behave in a rational way, but when there’s one overwhelming catalyst, it’s best to make hay when the sun shines and “go for the jugular.”

Investing the Soros way requires a significant amount of confidence in your own investing skill. The outsized trading profits the billionaire made over the years were only possible due to the size of the positions he was running. True, if these positions had gone against him, it would have been a disaster for Soros and his investors, which is why this strategy isn’t suitable for everyone. Nonetheless, if it weren’t for his confidence to go all in on the most significant bets, it’s unlikely Soros would have made the name for himself that he has done today.