The Trade of the 20th Century: Soros and the British Pound

An in-depth expose about George Soros in the 1990s, shared by Value Walk, is reminding the financial world of a time where the billionaire philanthropist challenged all perceptions of investing with a bold move that boosted his fortune practically overnight.

It was in 1992 that George Soros took a bet against the Bank of England, shaking the confidence Great Britain had in its currency’s strength and netting him more than a billion dollars in profit along the way. It’s important to remember when this bet took place. Though many think of hedge funds in a way that’s supported by 24-hour news cycles, where the activities of investors are continuously gossiped about from nearly every outlet available, the early ’90s had restrictions on the flow of capital and the aggressiveness of this particular method of investing wasn’t as energetic as the recklessness one would associates with stockbrokers in the 1980s.

What helped Soros make such a killing on this bet was Great Britain’s economic climate at the time. 1990 was a time of high inflation, low productivity, and even lower confidence in government to act competently in regards to all maters regarding the economy.

Margaret Thatcher, then Prime Minister, opposed her own party as they sought to take action by joining the European Exchange Rate Mechanism, making the British pound more competitive with Germany’s Deutschmark, and hopefully better the British economy on www.nybooks.com/contributors/george-soros/ by limiting government manipulation and encouraging monetary stability. For a time this was the case, and the currency was viable until the global recession of 1992 which cause Great Britain’s unemployment to rise up to 12.7%. Being that they were members of the ERM for about two years at that point, the options available to the British government were rather limited.

George Soros, who has the head of the Quantum Fund at the time, his own hedge fund that he’d been running for over twenty years at that point, was at the top of his career in investing and was likely on the prowl for the next big thing to increase his already vast fortune. Typically, hedge funds are dedicated to investing the money of wealthy clients who are looking to place their bets with companies that will provide a healthy return on investment, and most managers, depending on the size of their client pool, can looking forward to a sizeable salary regardless of what they’re able to provide them.

George Soros, however, demonstrated his understanding of the market by setting his sights on the British pound. Interest rates and exchange values were not consistent with a healthy economy at the time, and many analysts could see the British government was scrambling for an answer. However, the pound held through the summer of ’92. But then, things changed when German banks sought to break ties with the Britain after seeing little benefit to their ERM arrangement.

As you can imagine, these were a set of conditions that fostered an environment that welcomed any investor who can read that terrain.

Those interested can find their way to the entire story by making their way over to Value Walk.
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