At the headquarters of Quantum Fund, Stanley Druckenmiller, at the age of thirty-eight, was looking at a thick stack of analysis reports on the economic situation in the UK, tapping the table silently.
Druckenmiller was the head of this fund, contemplating whether there were opportunities to be found in the European Monetary System.
Ten years ago, this young man, then only twenty-eight, founded Duquesne Capital Management. Four years later, a mutual fund invited him to manage several funds while running Duquesne Capital. One of these funds rose by forty percent in just three months, making this young fund manager famous.
Druckenmiller still remembered a night in August 1989. Although he had been hired by Quantum Fund and became one of its twelve managers, he still flew back and forth between New York and Pittsburgh because he was still running his own Duquesne Fund there. Then, his bond positions at Quantum Fund were sold without his knowledge, which infuriated him.
He couldn't succeed working under a boss who doubted his abilities. So he called George Soros, the head and largest shareholder of Quantum Fund, a Wall Street celebrity.
"You're tying my hands," Druckenmiller said loudly, without any hesitation, "I'm scared by situations like this. I feel angry because I can do better!"
"I want to leave," Druckenmiller finally said to Soros.
Soros was silent on the other end of the phone, thinking for a long time before making a decision. "Don't leave," Soros replied, "I will."
George Soros was the founder of Quantum Fund and its largest shareholder. This Eastern European Jew was a well-known figure on Wall Street, having been a major player since the 1980s, earning over $100 million in the UK securities market.
Although Druckenmiller was already a famous fund manager and was called Soros's clone due to their similarities, leaving his own fund and handing over management to a younger colleague was undoubtedly Soros's biggest risk.
However, this risk was worth it. Druckenmiller soon brought him astonishing returns.
In 1989, Quantum Fund's return was 31.5%, in 1990 it was 29.46%, and in 1991 it reached an astonishing 53.4%, making Soros the highest earner in the United States that year, with a total of $1.7 billion.
Although Druckenmiller was one of the twelve managers of Quantum Fund, in reality, he controlled the entire company's operations, second only to Soros internally.
In recent years, due to the rapid growth in investment performance, the scale of Quantum Fund had continuously expanded, reaching $5 billion by 1992.
"Stanley, have you seen that report?" The phone rang, and the voice on the other end was a bit hoarse and somewhat excited.
"Yes, this exchange rate system has problems. I'm still thinking about how to operate!" Druckenmiller said absentmindedly, looking at the report in his hand.
He said this because, in his view, the opportunity for arbitrage had not yet appeared, and he didn't know when it would.
"Stanley, you're also an expert in the German market. What do you think about Germany's economic outlook?" The voice on the other end pressed, not letting up.
"Interest rates are unlikely to be cut in the short term. After all, the reunified Germany still has many problems to solve." Druckenmiller frowned, as if he had figured something out.
He knew that the person on the phone was thinking along the same lines, but what Druckenmiller was unsure about was how he could predict the timing of events.
"You must be thinking that, right?" The person on the phone was not surprised, having thought the same thing as Druckenmiller.
"Right, I think... no, no, you can't be thinking of... attacking the pound!" Druckenmiller was first confused, then thought of a possibility, and was shocked, even stuttering.
"Why not, Stanley?" Soros countered, "Do you remember the mark position?"
This was shortly after Druckenmiller joined. He had established a large short position in the dollar and a long position in the German mark because he was bearish on the dollar. When the mark appreciated and the dollar depreciated, these positions began to profit. Soros asked him, "How large is your position?" Druckenmiller proudly replied, "One billion dollars!" To his surprise, Soros disdainfully said, "Is that what you call a position?"
This comment deeply affected Druckenmiller. Later, under Soros's advice, Druckenmiller doubled his position, using almost all of Quantum Fund's capital at the time.
From then on, the most important principle Druckenmiller learned from Soros was: the direction of the trade is not as important as how much you profit when you're right and how much you lose when you're wrong. In other words, maximize profits when you're right.
"Once you have extreme confidence in a trade, you should seize the opportunity by the throat, like a pig." "Have the courage to be a pig." Druckenmiller looked at the yellow ceramic pig on his desk, named "Jeremy," and fell silent.
This time was different from before. In the past, whether in the bond market, exchange rate market, or stock market, central banks would not intervene because it was normal investment behavior. But attacking the pound would affect the exchange rate, and central banks would definitely intervene.
Thinking about the foreign exchange reserves of the Bank of England, Druckenmiller felt a chill. The Bank of England's dollar assets were several times the size of Quantum Fund, and they could adjust the overnight interbank lending rate at any time to prevent the selling of pounds.
"Stanley, I know what you're thinking, but you're missing a very important point." The voice on the phone did not fall silent but instead gave a reason that Druckenmiller had not considered.
"I was the most profitable person in the market last year, so everyone will be watching what I do!" Soros said with a hint of pride.
Yes, the market has a habit of following the lead, especially when a star hedge fund manager achieves significant performance. Market participants often follow him, which is the herd effect.
"If that's the case..."
Druckenmiller fell silent. If he could unite the market's funds, they might have a chance against the Bank of England. His mind raced, considering the feasibility of this plan and its subsequent impact.
"Besides that, we might need to borrow some money?" The voice on the phone continued.
"Borrow money, borrow what money?" Druckenmiller was momentarily confused and asked involuntarily.
"I plan to use my fund as collateral to borrow an equal amount of cash from the bank. That way, we will have about $10 billion to operate!" Soros said calmly on the other end of the phone.
"What?"
Although Soros's share in Quantum Fund was significant, the other parts belonged to other clients. If they were pledged, it might not be appropriate.
Actually, this was a simple financing issue, but because part of the capital in Quantum Fund did not belong to the managers, it was a bit complicated.
"What about the clients?" Druckenmiller was at a loss, unsure if such behavior violated professional ethics.
"Stanley, remember, our greatest professional ethics is to help clients make a profit. The means are not important, do you understand? Remember, be like a pig!" By "pig," he meant that once you have confidence in a trade, you should hold on tightly.
"There are many details to discuss. I will arrange a meeting to discuss the relevant content and report back to you."
"Okay, Stanley, let's move forward." The call ended.
Soon, the news that Quantum Fund, which had a 50% return last year, had borrowed $5 billion spread throughout the hedge fund industry. Peers keenly sensed that a great opportunity to make money was coming.
It wasn't just Quantum Fund that had discovered the problems in the European Monetary System. In fact, many hedge funds on Wall Street had also noticed this issue. However, with the scale of their managed funds, they couldn't shake the pound's position. When they heard that Soros's Quantum Fund had borrowed $5 billion, many realized that Soros was likely to target one or even several currencies in the European Monetary System.
A once-in-a-lifetime opportunity.
Many hedge funds and international capital began to focus on Europe. They gradually cleared their positions in other areas, transferred cash to Europe, and closely monitored the exchange rates of several currencies against the dollar. Every price movement reflected countless pieces of information.
"They will attack the lira and the pound!" Julian Robertson, the head of Tiger Fund, another famous figure on Wall Street, was listening to his analyst.
At that moment, in a spacious meeting room, most of the analysts present had red eyes. After receiving the news of Quantum Fund's fundraising, these elites began analyzing which currency would be the target. After considering political, economic, and other factors, they reached this conclusion.
Yes, the mark was unbreakable, and the franc was the same. If it were other countries' currencies, it wouldn't require such a large amount of money. Among the dozen member states, only countries like the UK and Italy had weak economies and needed to boost their economies.