George Soros and Hedge Funds

A number of energetic people fled from behind the Iron Curtain in the years after World War II. One, George Soros, carried with him a European's sense of philosophy that he applied to understanding markets. Although not trained as an economist or accountant perhaps because of this gap Soros took a psychological and cultural approach to predicting markets. Through his flagship fund, the Quantum Fund, registered outside the United States for flexibility, he would take major positions for or against foreign exchange, derivatives, emerging markets, bonds, private markets or almost anything. Any market was fair game for his group. And he would use leverage to amplify his wagers when called for. Results were outstanding although the volatility was not for the faint.

More recently, he has been writing about his investment style. Coverage in news reverses his trading desk mentality never to discuss his trading positions. And his model book on reflexivity, The Alchemy of Finance, explains his investment approach, which factors investment expectation into structure to make things that seem obvious actually occur. Indeed, the Quantum Fund's name is a reference to Heisenberg's Uncertainty Principle, which describes our inability to predict the behavior of sub-atomic particles.

But Soros's main skill is as a guerrilla investor willing to explore any market, study it more than others, strike with style and quietly withdraw, most often with a profit. In 1992, he became known as "the man who broke the Bank of England" after his attack on sterling forced its exit from the European Union's fixed exchange rate system and reputedly netted the Quantum Fund $1 billion in a day.

George Soros is a complete person and public figure, described variously as hard-nosed financier, philosopher-king, and latter-day Robin Hood. The activities of his charities are well-covered and substantial, especially in the former Soviet sphere, where his Soros Foundation has been more generous than all but two other entities, both of which are big countries. He claims that over half his time now is spent giving money away. So his life is making the transition to that which could be called a private statesman.

Nevertheless, in 1998, Soros suffered some serious setbacks. Not only was his new book on global capitalism poorly received and the Quantum Fund forced into restructuring, but his August letter to the Financial Times on the economic chaos in Russia seemed to trigger the country's debt default and currency devaluation. As the Moscow Times noted, Soros issued what was perhaps the most humiliating statement of his career: "The turmoil in Russian financial markets is not due to anything I said or did. We have no intention of shorting the currency. In fact our portfolio would be hurt by any devaluation." But it was too late: the theory of reflexivity played a cruel joke on its creator and on the ruble.