Unlike most hedge funds that rely on analysis reports from international investment banks, Tiger Fund has a team of star analysts that can rival those of international investment banks. These people are all top performers, from the stock market to foreign exchange, from commodities to the bond market. Naturally, their compensation is also significantly higher than their peers.
Upon receiving the news that Quantum Fund was raising substantial capital, these keen-sighted analysts immediately sensed that this renowned peer on Wall Street was about to make a big move. After several consecutive all-nighters of research, they locked their target on the European Monetary System, even analyzing the specific currencies in detail.
Tiger Fund, established in 1980, gained fame by aggressively shorting during the 1987 stock market crash, achieving investment returns that were hard to match. Besides the flagship Tiger Fund, they had three other funds named after the jaguar, puma, and lynx, reflecting the aggressive and predatory nature of Julian Robertson's hedge funds.
Initially, Tiger Fund's primary investment strategy was focused on stocks. However, in the mid-to-late 1980s, with the frequent introduction of financial derivatives, Tiger Fund began to venture into government bonds, currencies, interest rates, and related futures and options markets, becoming a typical "macro" hedge fund.
Like Quantum Fund, Tiger Fund was also a favorite of the market. Analysts recruited from major investment banks like Goodman and Stanley diligently analyzed every stock, enabling Tiger Fund to outperform its peers. As a result, Tiger Fund became the third hedge fund on Wall Street to manage over a billion dollars, alongside Quantum Fund and Steinhart's fund.
Julian Robertson had always harbored resentment over Quantum Fund's publicized performance, obsessed with comparing himself to George Soros. Deep down, he was envious of Soros's status as a public figure. This envy led him to aggressively expand the fund's scale.
However, as the fund grew, opportunities to maintain a value of several billion dollars in the U.S. stock market became scarce. Therefore, Tiger Fund began investing in foreign capital markets and redoubled its efforts in the currency market to maintain its ultra-high returns.
In this context, foreign exchange and bonds became the focus of Tiger Fund's investments.
At this time, he should have been in Germany with his good friend and employee, John Griffin, inspecting companies. After the fall of the Berlin Wall, their fund had heavily invested in German securities and had been continuously examining the German market since the following year. However, upon hearing the news about Quantum Fund, they rushed back to their office on the south side of Central Park in New York.
"How exactly will they do it?" Robertson looked at his foreign exchange trader, a young man named Barry Bosano. Barry was also from one of the two most famous international investment banks and was an expert in the foreign exchange market.
"Based on my speculation, they might sell the British pound and buy the German mark, then profit from the difference. If possible, they might push the pound down by a few percentage points to gain profit, but..." Barry spoke fluently, but suddenly stopped at the end.
"Then what?" Everyone looked at him, waiting for the rest.
"The Bank of England will definitely intervene. They have over $40 billion in foreign exchange reserves. Once the Bank of England acts, Quantum Fund's capital will be insignificant." Barry's words shocked everyone. Indeed, if the pound were to depreciate, the Bank of England would certainly intervene, leaving little room for arbitrage.
"No, he would have considered that as well," Robertson shook his head. "Other arbitrage funds won't miss such an opportunity either. We can't assume only Quantum Fund is involved; many others are likely to have the same idea."
"Besides the funds that specialize in finding opportunities in the foreign exchange market, we must also consider the foreign exchange departments of banks and the financial departments of multinational corporations. Even our peers like Paul Jones won't stand idly by."
Paul Jones, whom he mentioned, was another capital operations expert on Wall Street, founder of Tudor Investment Corporation, and a major player in the hedge fund industry, with performance that was no less impressive than Quantum Fund and Tiger Fund.
"In that case, won't the U.K. face attacks from many sources of capital?" John suddenly realized.
"However, I believe the major central banks in Europe won't stand by and let this happen. If the pound exits the European Monetary System, it would be a significant blow to the future euro," Barry said firmly.
Indeed, Europe aimed to form a monetary union, and the charters stipulated that central banks had the obligation to maintain their currency exchange rates within specified limits. If one currency was attacked, another strong currency would also have to make corresponding adjustments, effectively fighting against two central banks.
In this monetary system, the role of the German Bundesbank was almost equivalent to that of a European central bank. Simultaneously attacking the German mark and the British pound was clearly impossible.
"The mark is unlikely to depreciate in the short term, as they have maintained a reasonable inflation rate for many years. If we buy the mark as a hedge against risk and then sell the pound, we might profit to some extent," Barry suggested, seeing everyone's silence. This idea had been in his mind for a long time, and he believed it was the most prudent approach.
"But if the German mark also depreciates, wouldn't our assets suffer a double loss?" Tom McCauley, an analyst, quickly voiced his concern. Indeed, most of their assets were in dollars, and if both currencies depreciated, it would offset the negative effects of the pound's depreciation and severely impact dollar-denominated capital.
This analyst was well-known among his peers, not for his outstanding analysis but for an incident during a company retreat. Everyone crossed a rope bridge spanning a sand pit, hundreds of feet above a cliff. The young analysts secured their safety harnesses to the bridge and slid across. Tom, however, fell during the slide and hung ten feet below the bridge. Everyone was terrified, but Tom laughed and bounced on the safety line as if it were a fun game. It was then discovered that Tom had only one safety line, which was about to come loose. In this life-threatening moment, Tom was oblivious, but fortunately, the safety lock caught his harness, saving him from a fatal fall.
From that day on, Tom's actions were deeply etched in everyone's memory and spread throughout the company.
However, his suggestion was somewhat naive, which was not surprising given his lack of expertise in the foreign exchange market.
"Impossible!" Most of the foreign exchange analysts in the room said in unison. They were seasoned experts in the foreign exchange market, with far deeper insights than Tom's superficial understanding.
Due to the mark's strong position in the European Monetary System, the European Currency Unit could resist the dollar. If the mark also depreciated, it would be unacceptable for the European economy, which aimed to challenge the dollar's dominant economic position.
"Let's go with this!" Robertson made the final decision.
Most of the analysts in the room understood Robertson's character. Once he made a judgment, he would stick to it, even if it meant losing half of the capital.
John Griffin understood this best. In 1987, he strongly advised Robertson to short a small Chinese machinery manufacturer. They started shorting at $20, and during the Christmas season, the company's sales surged, pushing the stock price to $25, resulting in a loss of over 25%. They still believed in their judgment, and by 1988, the stock price reached $40, causing a 100% loss. Despite this, they did not give up. In April 1989, due to political turmoil, all U.S. companies with factories in China saw their stock prices plummet, and their efforts finally paid off. This was two years after they started shorting the stock.
When macro traders tried to hedge their positions and control risks, Robertson would roar at them, "Hedge? That means if I'm right, I'll earn less money!"
Over time, these traders became very aggressive in certain macro trades, sometimes taking no risk control measures at all.
Seeing Robertson make up his mind, the analysts stopped arguing and began analyzing the potential global economic impact if the pound depreciated, particularly on other weak currencies in the European Monetary System and the important currency, the Japanese yen.
Similar scenes were playing out in other corners of Wall Street, where capital sensitive to foreign exchange movements sensed a storm was brewing. (Thank you, TomUN, for your generous support! Thank you, Unnamed, for your two donations! I hope everyone will actively support the book. A vote is just a click away, and I am very grateful! The success of this book is due to everyone's efforts!)