George Soros and 1987: when your longs & shorts BOTH go against you

I can relate to situations where all my positions went against me…and I’m sure some participants can relate to that as well YTD. So imagine the following scenario:

It’s 1987 and you’re the Quantum Fund:

  • Soros’s team was up ~60% by the end of September, 1987
  • Quantum was positioned short Japan but long the U.S. market.
  • On October 14 Soros published an article in the Financial Times reaffirming his view that the crash would arrive in Tokyo.
  • That day, followed by the 15th and 16th, US equities declined precipitously.
  • October 19, went down in history as Black Monday. The Dow Jones index lost 22.6 percent of its value. Soros, having been short Japan (Nikkei index fell too), was hedged.
  • US equities rallied Tuesday and Wednesday.
  • Later in the week (Wednesday) however, the nikkei-related short (structured via futures in HK, due to greater liquidity in that market) position INCREASED in value by 9.3% (its biggest one day gain since 1949). He had wanted to get out of these contracts, but HK halted them.
  • US Futures declined on Thursday…and Soros sold us futures.. his position sizing was too large, exacerbating the move down.
  • In roughly a week, Quantum had gone from being up 60 percent for the year to being some 10 percent down; $840 million had vanished.

 

A week or two after Black Monday, Soros spotted an opportunity to short the dollar, and he put on a gutsy, leveraged position as though nothing untoward had happened. The dollar duly fell, and the gamble paid off. Quantum ended 1987 up 13 percent, despite having languished in the red only two months earlier.

Source: More Money Than God by Sebastian Mallaby

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