Seven ingenious shorts
Some trades become the stuff of legend. Here are seven of the most audacious trades ever.
1. The Great Bear of Wall Street
When it comes to shorting, Jesse Livermore (1877–1940) is something of a pioneer. Without any of the modern analysis tools available to today’s traders, he was able to predict future market prices with remarkable accuracy.
He first shorted the market in 1906, but his career-defining moment came during the Wall Street Crash of 1929. By using over 100 brokers to build shorting positions in advance of the market collapse, Livermore was able to conceal his intentions.
His prediction that the market was overheated proved correct, pocketing himself a $100 million haul, worth about $1.4 billion today. Unfortunately, Livermore was bankrupt just five years later.
2. The man who broke the Bank of England
Born in Budapest, George Soros survived Nazi-occupied Hungary before emigrating with his parents to England as a teenager in 1947. Forty-five years later, he’d be accused of ‘breaking’ its central bank.
Correctly predicting in 1992 that the British government was about to devalue the pound, he sold billions of the currency days before the devaluation. The day became known as Black Wednesday.
Today Soros is known for his philanthropy as much as his investment prowess, though his short of the Bank of England is perhaps his most famous achievement.
3. Shorting the kiwi
The US dollar fell off a cliff on Black Monday in 1987, leaving investors seeking refuge in other currencies. A 32-year-old trader for Bankers Trust named Andy Krieger suspected the New Zealand dollar was becoming significantly overvalued.
Krieger’s short, achieved by innovative options trades, was so large that he effectively controlled more kiwi dollar than was actually in circulation! The New Zealand government reportedly called Krieger’s employers in outrage, but it was too late. Kiwi dropped 5%, and Kreiger’s short netted $300 million.
Krieger was only paid a bonus of $3 million, which upset him so much he left to work for George Soros.
4. Betting on the invasion of Kuwait
Louis Bacon started trading with his student loan while in college, and quickly had to be bailed out by his father. Nevertheless, he’d go on to become one of the greatest ‘macro’ traders of all time.
As tensions flared between Iraq and Kuwait in 1990, Bacon went long on oil and short on stocks. When Saddam Hussein invaded Iraq’s oil-rich neighbour, Bacon’s bet paid off and his fund returned an incredible 86% that year.
5. Backing Black Monday
In 1987 the markets were booming and the mood on Wall Street was generally buoyant. But Paul Tudor Jones had reason to be pessimistic: after hours studying graphs of the Wall Street Crash of 1929, he became convinced history was about to repeat itself.
Two weeks before the bubble burst, the Tudor Investment Group moved aggressively against the market. The crash started in Hong Kong, then spread to Europe before making its way to the United States. The Dow Jones collapsed by 22% in a single day, breaking all previous records. But Tudor Jones? His short netted $100 million and a place in Wall Street legend.
6. The real ‘Big Short’
The 2015 blockbuster The Big Short was loosely based on Dr Michael Burry and Steve Eisman, who predicted the US subprime mortgage crash that led to the 2008 financial crisis.
In truth, while Burry may have been the first to spot the cracks in the US housing market, it was a trader named John Paulson who profited most. A competent but relatively unknown trader, Paulson purchased a swathe of credit default swaps against mortgage-backed securities. His profits were so huge that investors initially thought their statements contained typos! The fund ended up making over $20 billion from the short, with Paulson himself taking an estimated $4 billion.
7. Evil Knievil vs Northern Rock
‘I work on the assumption that I’m intellectually superior to 99 people out of 100 and I’d give the other man a good run for his money.’ So says infamous British spread better Simon Cawkwell, who has developed a name for himself in the UK thanks to his big personality and ruthless approach to the markets.
Cawkwell’s first headline-grabbing short occurred in 1990, when he publicly suggested that the Maxwell Communication Corporation was using creative accounting practices to hide its losses. His note was published under the name ‘Evil Knievil’, a nickname which has stuck to this day.
In 2007 he predicted the demise of Northern Rock, trousering a profit of over £1 million by short selling its shares.
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