Few men have made such a name for themselves in the financial world as George Soros. Known to many as the man who ‘broke the bank of England’, the Hungarian born, London educated and American based financier has been involved in asset management since the age of 26.
The Quantum fund was founded by Soros in 1969, and is said to have delivered an average of 20% annualised returns to its investors in the four decades of its existence. As of the start of 2012, the fund is now purely privately managed, in a move that was partly a result of the Obama administration’s intentions to try to draw the previously private hedge fund arena into its regulatory jurisdiction.
Like most, Soros started his City career as a trader, and it was during these formative years at F. M. Mayer that he developed his theory of market reflexivity. Such a theory posits that market valuations carry momentum, and that changing prices carry feedback effects that lead to imperfect market equilibria, which could then of course be exploited for profit. This theory has strong links to Hyman Minsky’s financial instability hypothesis, and inevitably led Soros to the world of the hedge fund, where profits were essential no matter what the current trend in the market.
At the age of 81, Soros seems to be winding down a career during which he has seen the world emerge from World War II, which he directly observed from the perspective of Jewish family living in Hungary during the Nazi occupation of 1944, all the way through to the ongoing financial crisis, in which he is an active correspondent with a variety of commentators in the US and Europe.
Throughout the span of his career, one particular trade will forever stand out as his most profitable and audacious speculation, and the one which most epitomised his investment philosophy. When Stanley Druckenmiller, a trader working for Soros in 1992 first noticed the weak position of the British Pound within the European Exchange Rate Mechanism (ERM), Soros encouraged him to increase his position, with the firm eventually staking around $10 billion on the belief that the currency would exit the ERM. The sheer size of his position and the publicity it gathered demonstrated reflexivity perfectly, and the pound crashed out in spectacular fashion. The government later revealed its loss to have been around $3.4 billion from its attempts to prop up the pound. Soros made a profit of around $1.1 billion.
Soros has since devoted much of his time to philanthropy, and his efforts to bring developing nations into the modern world have accumulated into a total outlay of an estimated $8 billion around the world, with particular attention given to Hungary’s development during its transition from communism to capitalism.
As this fabled figure withdraws ever more into private life, we would do well to keep in mind his humble beginnings, his investment principles and his charitable motivations. For a man as successful as he, though, his most enduring quality is his humility. In his own words, he “turned the belief in my own fallibility into the cornerstone of an elaborate philosophy.”