George Soros Trading Strategy — (Backtest, Setup and Performance)
Last Updated on May 29, 2023
“Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.” This quote by George Soros captures his primary trading strategy.
George Soros’ approach to trading is as a short-term speculator, making highly-leveraged bets on the direction of the financial markets based on market and macroeconomic analysis. In other words, Soros bets on the long or short direction of any market by studying the market movements, what other market participants are doing, and the actions of the government regulators.
Famously known as the man who broke the Bank of England, George Soros is widely considered one of the most successful traders and speculators of all time. His legendary hedge fund, the Quantum Fund, achieved an average annual return of 30% from 1970 to 2000. Who is he, and what’s George Soros’ trading strategy?
In this post, we look at this maverick investor and his life, career, trading philosophy, strategy, and trading rules.
Who is George Soros?
George Soros is a renowned hedge fund manager popularly known for his Quantum Fund, which has a great history of huge returns. He turned an original seed funding of $12 million into $20 billion by the first decade of the 21st century. To put it in perspective, if you had invested $1,000 in his Quantum Fund in 1969, you would have earned $4 million by 2000. That is an annual average growth rate of 30%!
In the trading and investing world, Soros is a revered name. He was named “the world’s greatest money manager” in 1981 by Institutional Investor magazine. In 1992, he was nicknamed “the man who broke the Bank of England (BOE)” following a trade he made that forced the BOE to change its policy.
Geroge Soros’ early Life
George Soros is a Hungarian-born American born into a prosperous Jewish family in 1930.
Soros lived his childhood in Budapest, Hungary, where he was born on August 12, 1930. The arrival of the Nazis in Hungary in 1944 caused the family to split up to avoid being sent to concentration camps. After WWII, he made his way to England to study in 1947 at the London School of Economics. His stay in London helped to shape his concept and approach to the financial markets and philosophy to life. It was after reading Karl Popper’s tome, “The Open Society and Its Enemies,” that he first combined the concepts of science and politics which became the basis of his philosophy.
Soros began his business career by taking various jobs at merchant banks in the United Kingdom, including the London merchant bank Singer & Friedlander. In 1956, he moved to New York City, where he worked initially as an analyst of European securities and rapidly made his mark before starting his first hedge fund, Double Eagle, in 1969.
The journey into the financial markets
Soros’ first post-graduate job was with F.M. Mayer, a New York City money management firm. In less than 20 years, he had opened his first investment firm, Soros Fund, which allowed him to apply his science and free markets principles to investments and he was able to test them in the markets. He later changed the name of the fund to the Quantum Fund.
How did George Soros become rich?
Soros became rich from trading in the financial markets. He started his first hedge fund, Double Eagle, in 1969. With profits from this fund, he started Soros Fund Management, his second hedge fund, in 1970. Later, in 1973, Double Eagle was renamed Quantum Fund and became the principal firm Soros advised.
Soros’s knowledge of regional and global economic trends, combined with his deep pockets and tolerance for risk, has allowed him to amass a fortune now valued in the billions. At its founding, Quantum Fund had $12 million in assets under management, and as of 2011, it had grown to over $25 billion — the majority of Soros’s overall net worth.
While his daring investment decisions caused the funds to grow rapidly, not all his bets succeeded. For example, he correctly predicted the global stock market crash of October 1987, but he was wrong in predicting that Japanese stocks would fall hardest of all.
Soros has made many remarkable trades over the course of his hedge fund carrier that spanned many decades. But the few that earned him the legendary status included his bet against the GBP in September 1992, which led the British government to devalue the pound sterling, and the bet against the Thai currency (the baht) and other Asian currencies during the Asian crisis of the late 1990s. These trades made him billions of dollars.
Soros has also taken some big hits in his career. For example, in 1994, he speculated that the dollar would rise in value against the Japanese yen, but instead, the dollar fell all year, and the Quantum Fund reportedly lost hundreds of millions on a single day in February.
His funds also lost lots of money in some of his plays during the Malaysian currency crisis in the late 1990s, as well as in his bets against internet stocks. In fact, he capitulated shortly before the dot-com burst he had anticipated. This shows why short selling is so difficult (read here for the pros and cons of short selling). You can ultimately be right, but the timing is wrong, and thus face huge drawdowns.
What is George Soros famous for?
George Soros is well known as “the man who broke the Bank of England (BOE)” for betting heavily against the GBP and forcing the BOE to devalue the pound. He made a profit of $1 billion in a single day, Sept. 16, 1992, from that bet. Here’s how it happened, and this also explains his trading strategy and philosophy:
The man who broke the Bank of England
Then, Britain was part of the European exchange rate mechanism (ERM), a fixed-exchange-rate agreement that pegged the GBP against the German marks. Soros anticipated that Britain could not defend that peg for long, given its political and economic turmoil linked to a policy of higher interest rates, so he bet heavily against the GBP. With the use of leverage, he took a $10 billion worth of short position on the pound. After resisting the devaluation and defending the pound for some time, the BOE floated the pound, and its value crashed.
When the pound crashed, he repaid his lenders based on the new, lower value of the pound, pocketing in excess of $1 billion in the difference between the value of the pound and the value of the mark during a single day’s trading. He made nearly $2 billion in total after unwinding his position.
The trade is considered one of the greatest of all time, and Soros was subsequently declared “the man who broke the Bank of England.”
The man who broke the Bank of Thailand
In fact, Soros also made similar trades on a number of other currencies. With his perseverance and deep pockets, he cowed several national governments on currency issues.
For example, during the Asian financial crisis in 1997, he bet almost $1 billion against the Thai currency, the baht, which was pegged at 25 to the USD, that it would go down and depreciate by using forward contracts to go long on USD/THB. The Bank of Thailand was forced to devalue the currency some weeks later.
This earned him another nickname: “the man who broke the Bank of Thailand” and pundits believed that the trade triggered the 1997 Asian Financial Crisis that affected not only Thailand but also South Korea, Indonesia, Malaysia, the Philippines, Hong Kong, and others. Although Soros denied it, Malaysian Prime Minister Mahathir bin Mohamad also singled him out as the person responsible for the decline of the ringgit.
George Soros’ trading strategy and philosophy (trading rules)
I don’t have a particular style of investing. More exactly, I change my style to fit the conditions. The Fund has changed its character many times. Put it this way: I do not play according to a given set of rules; I look for changes in the rules of the game.George Soros
George Soros is mainly a short-term macro speculator. His trading approach centered around making highly leveraged, one-way bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives, and other assets based on macroeconomic and market analysis.
He applied scientific inquiry in his investment strategy, merging it with his belief in free markets and human rights. The five key trading rules and elements of his investment approach are as follows:
- The “reflexivity” theory: The theory opines that the market participants themselves directly influence market fundamentals and that their irrational behavior leads to booms and busts that present investment opportunities. Soros uses reflexivity as the cornerstone of his investment strategy. He looks out for market bubbles and booms.
- Scientific method: Soros uses scientific methods to study the market. He uses current market data and probability to formulate a strategy that tracks what will transpire in the financial markets. He usually tests his theory with a smaller investment first and increases his investment if the theory proves positive.
- Physical cues: He also listens to his body when making investment decisions. For example, a headache or a backache could be enough for him to abandon an investment.
- Blending political acumen with investment acumen: Soros combines his knowledge of politics with his market analysis. For example, he once bet heavily against the U.K. government’s decision to hike interest rates in September 1992. That trade forced the BOE to devalue the British pound, sending stocks higher after that devaluation. Soros made about $1 billion from that trade and earned the famous moniker “The Man Who Broke the Bank of England.”
- Read and reflect: Soros has a handful of advisors/analysts he confers with when he wants to make big investment decisions. According to him, after discussing with his team of analysts, and making sure to review at least one contrary view to his strategy, he takes time “to read and reflect” before pulling the trigger.
What was George Soros’s main trading strategy?
George Soros is a maverick. According to him, instinct plays a large role in his investment decisions. However, he is well-informed about economic and political trends on a regional and global level, and he uses that knowledge to exploit market inefficiencies, making large, highly leveraged bets anywhere he sees an opportunity. Interestingly, he has both the capital and the risk tolerance for riding out these bets for longer than most hedge fund managers can.
Soros bases his trading principles on his theory of market reflexivity. According to him, market sentiment has a self-reinforcing effect (positive feedback), such that rising prices attract more buyers whose actions drive prices higher still until the process becomes unsustainable, and the bubble burst — the market comes crashing. On the other hand, falling prices induce more people to sell, driving prices further down until the prices become very attractive to investors, and a buying frenzy starts, giving rise to a new bullish trend.
Trading rule when to sell a position
While Soros uses his reflexivity principle to study the markets and has deep knowledge of global markets and excellent sources of information, knowing the exact moment to close out a trade is more of a gut feeling than a market signal. He has mastered the markets so much that he instinctively knows when the time has come to close out for a profit long before he can rationalize the decision.
George Soros’s global macro strategy
Soros’s hedge funds are well known for using the global macro strategy — an investment approach that is centered around making massive, one-way bets on different financial assets, such as currency rates, commodity prices, stocks, bonds, and derivatives based on macroeconomic analysis. Generally, the macroeconomic analysis focuses on three things: national output (measured by gross domestic product), unemployment, and inflation.
Thus, global macro funds, such as Soros’s, build portfolios around predictions of large-scale shifts in GDP, unemployment rates, inflation, interest rates, currency exchange rates, political changes, and policy changes across nations, continents, and the world as a whole. The global macro strategy allows funds to place any type of trade on almost any type of security in any country of choice.
Soros loves to give back to the community and he is known for his vocal and financial support for liberal social causes. In fact, started his philanthropic work in South Africa in 1979.
He founded the Open Society Foundations (OSF), a philanthropic organization that “builds vibrant and tolerant societies whose governments are accountable and open to the participation of all people,” as described by the foundation’s website.
As of March 31, 2013, George Soros had donated over $8.5 billion to charity through his foundation, which seeks to “strengthen the rule of law; respect for human rights, minorities, and a diversity of opinions; democratically elected governments; and a civil society that helps keep government power in check.”
What is the Open Society Foundation?
Open Society Foundations (OSF), formerly the Open Society Institute, was founded by George Soros in 1993. Before then, Soros had been involved in many philanthropic works.
The Open Society Foundations are the world’s largest private funder of independent groups working for justice, democratic governance, and human rights. The group’s name is inspired by Karl Popper’s 1945 book The Open Society and Its Enemies. Its works are present in over 120 countries around the world, where they financially support civil society groups around the world, with a stated aim of advancing justice, education, public health, and independent media.
Over the years, Soros has given a total of $32 billion to the Foundations. He has also supported education — for example, it gave a $500 million endowment in 2021 to Bard College in Annandale-on-Hudson, N.Y.10. The OSF has a group of country and regional foundations, such as the Open Society Initiative for West Africa, and the Open Society Initiative for Southern Africa. It provides thousands of grants every year through a network of national and regional foundations and offices, funding a vast array of projects.
What companies does George Soros own?
George Soros owns the Soros Fund Management, LLC, and the Quantum Group of Funds, which are privately owned funds based in London, New York, the Caymans Islands, and Curacao. In addition to the hedge funds, Soros also owns Open Society Foundations, as described above, which is a non-profit charitable organization.
In terms of investments, Soros invests in many companies, including Alphabet (Google), Activision, T-Mobile, Disney, General Motors, and Salesforce. However, as a trader, he doesn’t hold any company’s stock forever, as his aim is to profit from short-term to medium-term price fluctuations.
George Soros’ trading mates
Several other famous traders and investors have worked alongside George Soros: Jim Rogers, Stanley Druckenmiller, and Victor Niederhoffer.