The struggling U.S. dollar appeared to take another hit yesterday. Appearing briefly on CNBC, George Soros, the hedge-fund manager who earned his place in trading history by betting successfully against the British pound in 1992, disclosed that “I now have a short position against the dollar.” Having taken the position “relatively recently,” Soros was now betting that the dollar would decline in value “against the euro, against the Canadian dollar, the Australian dollar, New Zealand dollar and gold.”
A decade ago, such a statement would have sent convulsions through the currency markets. But thus far, Soros’ musings haven’t had any noticeable effect. That’s because Soros and the type of hedge fund that he represents occupy a much different place in the investing firmament in 2003 than they did in 1993. To a large degree, his currency bets simply don’t matter much anymore.
In the 1990s, Soros (born in Hungary, educated in Great Britain, and based in the United States) became a prominent player on the global stage. He used profits from his immensely successful Quantum Funds to endow democracy initiatives in Eastern Europe and penned big-think tomes on finance, globalization, and the future of capitalism.
The Quantum Funds typified a species that once sat atop the hedge-fund food chain. So-called global macro funds—others included Julian Robertson’s Tiger Management and the ill-fated Long-Term Capital Management—made massive, highly leveraged “macro strategy” bets. They would buy bonds, stocks, or currencies—or all three—in a particular market, based on broad economic assumptions. They would short the S&P 500 if they thought the U.S. market was bound to fall, or go long the deutsche mark if they believed Germany was poised for a recovery. In 1990, when hedge funds collectively had about $50 billion in assets, “anywhere from 50 to 70 percent of the funds were in global macro funds,” according to Robert Rosenbaum, senior vice president at Tremont Advisers.
By borrowing money to buy and sell futures contracts—themselves a powerful form of leverage—macro funds possessed the capability to move indexes like Japan’s Nikkei or to influence significantly the value of important international currencies. Which is exactly what Soros did in 1992, when he earned an estimated $1 billion profit by helping push the British pound out of the European Exchange Rate Mechanism. Soros was lionized—or demonized—as “the man who broke the Bank of England,” and his opinions about currencies—and his ability to leverage up huge positions in them—could become self-fulfilling. In 1997, Malaysian Prime Minister Mahathir Mohamad accused Soros of bringing down the Malaysian ringgit. (This research paper concludes that Soros and other hedge-fund managers did not ring up huge profits by betting against the ringgit.)
In fact, it turns out that the market volatility of the late 1990s was bad for the global macro funds. Long-Term Capital famously melted down in 1998. And with passively managed index funds racking up 30 percent annual gains in the late 1990s, the returns racked up by risky global macro funds didn’t seem so special. No longer able to compete in a stock market he deemed irrational, Julian Robertson essentially retired in March 2000. Others, like Soros and Paul Tudor Jones, started to behave more like other stock-pickers, betting on individual stocks or sectors. In the ninth inning of the bull market, for example, Soros started buying tech stocks. And in April 2000, with the Quantum Funds down for the year, Soros ostensibly retired.
Last year, Business Week reported that Soros had quietly returned to the active management of Quantum. But now Quantum eschews large currency bets in favor of concentrated positions in a few stocks. And while it’s still large, Quantum is a shadow of its former self. Fortune’s recent takeout on the hedge-fund elite doesn’t even mention Soros. At the end of 2002, according to Tremont Advisers, global macro funds made up only 9.87 percent of the estimated $600 billion hedge-fund industry.
When it comes to currency trading, this is a much different world than it was in the early 1990s. Economies are far more interconnected than a decade ago; currency markets are far more liquid and active. Each day, some $2 trillion in currencies is traded—several times the size of the daily trade in 1993. (Soros brought down the Bank of England with a $10 billion leveraged position.) Today, professional speculators do not conduct most currency trading, even in comparatively obscure currencies. Foreign exchange markets are more The Lexus and the Olive Tree than Liar’s Poker. Exchange rates are effectively set by American backpackers taking rupees out of a cash machine in Bombay, or Italian tourists getting dollars at Disneyland, or Nokia selling phone equipment to China Telecom, or Coca-Cola selling syrup to a South African bottler, or Daimler buying Chrysler, or Intel paying local firms to construct a facility in Taiwan—in fact by the interaction of all these forces. The unfathomably immense number of cross-border transactions, investments, and exchanges now affects currencies far more than any single trader can.
Soros obviously grasps the change, which is why he may be spending more time writing books about globalization than trying to influence the fate of national currencies. During his CNBC interview, the financier explicitly posed as more of an attentive bystander than a catalyst. He was short the dollar, “because I listen to what the secretary of treasury is telling me. So who am I to stand in the way?”