Given his experience, I am surprised that he lost that much money. Maybe he became so personal after the election, and the loss is as a result of that. Any behavioural or psychologically affected trading leads to negative performance
What is interesting is that, IIRC, Soros was pretty skeptical of the Reagan rally in the 80's. I recall from the Alchemy of Finance that he kept trying to bet against it saying that the thesis of the 'bull market of a lifetime' was wrong. But at some point he gave up on that and banked huge from the upside. Mostly due the leverage that he got from stock index futures. In the case of the Trump rally, it could be that his wrong call was compounded by the fact that it happened at the end of the year. We know that the Soros position sizing method takes into account 'year to date profits' https://www.elitetrader.com/et/threads/the-george-soros-position-sizing-method.133703/ So while some use an absolute "risk budget" for short positions/discretionary trades (like I use of 0.5-1%), he uses a dynamic budget that varies depending on how much he is up on the year. Given that he finished the year up 5% even after the loss, he probably felt he could risk as much as ~3% on his bearish bets because he was having an ok up year at that point
Yes its possible that he got involved emotionally/politically. He is also old and that could be coming out of his performance. But its hard to say, he does have that dynamic risk budget and is said not to fall in love with positions. Also, IIRC, his risk on the GBP trade was something like 10%. So he is not afraid of even bigger bets. A 3% loss on a year that he was up mid single digits seems ok
One of the reasons I'm allocating so little risk to shorting/discretionary macro trades is because I'm not finding this enviroment very good for macro. At least not in the US. If you look last year there were maybe 3 good 'macro trades'. Short ES in the first few months and short bonds and gold after the election (I guess, long USD as well). With ES, if you didnt take profits you then watched all of them evaporate. With bonds and gold, they were rippping most of the year, then you had a small window of a few months where they sold off hard, and again, if you didnt take your profits now they are starting to evaporate. Fed futures were pretty efficient most of the year. But whats tough is that you usually are not going to short any of those markets and catch the move right away. You are going to bleed out a little (maybe 1% here and there) before you capture them. Those little losses add up, and if you dont take your profits quick, you give back gains. Overall, it might be there these trades will be barely profitable (if at all), unless you time then pretty well going in and going out. Its tough to do that. Druckenmiller seems to be an expert on this, he says he makes most of his money in bear markets. I can see why, usually these sorts of trades play out QUICKLY. So if you have a big position, you dont find a reason to get out, the money keep coming and that gives you positive reinforcement to stick around. One of the issues that I face with some of my macro themes (like Brazil) is that its a long-term thesis, as a result it takes forever to play out. Its hard to put a big position and just hold it forever, its also risky because as time gets streched out, you become more vulnerable to uncertainty and subject to pretty nasty drawdowns. There is a reason why the computer finds optimal an allocation of 30-50% in equities for the long-term. If you own 100%, you better be right short-term, if you need a long time for it to play out, you are vulnerable to big drawdowns. These "Druckenmiller" trades dont need that much time, either they are going to work soon or they aren't, because of that you can lever them up. But its so hard because markets just keep creeping higher most of the year. The windows to bet against and make money quick are small and you got to time pretty well I dont feel like I have that skill developed to the point where I can risk a lot to putting these trades on so my risk budget is small. Hopefully I will get better and be able to allocate more to it I also look forward to getting better at trading currencies. it would expand the potential universe of 'druckenmiller' trades that I look at
Soros seems to follow an approach of owining positive earning assets with long-term thesis like specific stocks, some gold and I would imagine some fixed income as well (I recall they were invested in Bill Gross new bond fund but then they pulled out). Soros also puts money in some hedge funds. Overall he seems to follow the approach I have found to be pretty good. Which is to own a diversified pool of "beta" assets (a balanced portfolio) as well some diversified "alpha" assets (good external managers) for further boosting of returns. Then use this basic portfolio to produce decent (5-7%) annual returns while waiting for specific opportunities to put in leveraged trades (What I'm calling Druckenmiller trades). These are usually on the short side but can be long as well. They would be quick swing/position trades in highly liquid markets that are suffering a big dislocation (leading to a big move) in a short-period. The large move in a short period makes betting in the direction of the move such a nobrainer (huge sharpe/sortino ratio) that one can leverage up quite aggressively. That's when he will rejuice his returns further from the 5-7% to stronger 20%+ years As I understand Soros pulled back from higher risk taking since he turned his fund into an endowment so he probably wont go as big as he used to be but he is still probably still out there, lurking for an opportunity to take on those Druckenmiller type trades
If you look at EWZ from 2003 to 2008, that thing went up like 10 fold, yet, it wasn't a Druckenmiller type trade that one can leverage up huge and produce outstanding years. There were some NASTY sell-offs along the way. If you are long 100%+, its hard to stomatch losing 30-50% of your money in a few months. As a fund, if you do that, you are gone. But even as a private investor, its hard to stomach such loss and continue with the investment. At some point you might make a mistake, sell at the wrong time, add at the wrong time. You are also taking higher risk or ruin (if you are 100%+ long). Since its a long-term move, you are also taking all kinds of 'Extremistan' type risks as the world changes and these changes could surprise you (as 2008 did to EWZ investors when commodities blew up). So these types of positions cant really be sized so aggressively unless its a very specific type of situation where you think short-term markets aren't going to pull back much (perhaps because you are buying an oversold panic) The Druckenmiller type trades are a lot faster, markets adjust in a few months or a year or two without giving you a lot of heat. If you are getting a lot of heat, you are probably wrong. As a result, the Sortino ratio of these trades is off the charts, because of that, you can put in some huge bets in it
I was reading about some game theory concepts like Maximax, Maximin and Minimax regret https://cs.stanford.edu/people/eroberts/courses/soco/projects/1998-99/game-theory/Minimax.html https://en.wikipedia.org/wiki/Regret_(decision_theory)#Minimax_regret And that got me thinking about using this for investment. If someone only could pick 1 class, how would those tools help with a recommended an asset allocation? Maximax tries to maximize payoff regardless of risks, so that would be a 100% equity portfolio (and if allowed more discretion, 100% in Emerging Markets), let's call this the Buffett strategy. Maximin tries to minimize the worse possible case (drawdowns). It avoids it at all costs. The asset allocation would be 100% in T-Bills. Let's call this the Zerohedge strategy Minimax regreat is more complicated because it looks at not only at positive payoffs but negative payoffs, it tries to maximize the DISTANCE between payoffs. It wants the most 'bang for the buck', it wants to give up the least in returns (relative to 100% in equities) while at the same time minimizing drawdowns relative to the alternatives. Since only 1 asset class is allowed (which makes things more complicated), stocks are out because they can lose 50% or more of your money. You would be losing that while the guy in T-bills is probably not losing a thing. The 'distance' between them (the regret) is enormous. But T-Bills is also out because they return so little relative bonds or stocks that most years you will experience quite a bit of regret. You will make 1-3% when stocks or other assets are taking home 10%+ or more. So there is also an issue that is raised here https://en.wikipedia.org/wiki/Wald's_maximin_model The blue decision has a worse worst case loss than the red line but it has a payoff that is better the vast majority of the time. So overall, you get more bang for the buck for it and is therefore a better decision. So its not only an issue of distance of payoffs but also FREQUENCY Which asset class would be the holy grail according to minimax regret? I can think of two classes: investment grade corporate bonds and REITs IG corp bonds because they return more than government bonds the vast majority of the time and have a return that is less than stocks but not by a huge amount (like T-Bills), while at the same time the drawdowns on them have historically been quite limited. Even in the Great Depression the default rates on IG bonds wasn't off the charts (IIRC it was 5%). If the duration in these IG bonds is kept lowish, that provides another layer of 'regret' protection Similarly with REITs (but perhaps much less so), they will return more than bonds, less than stocks. Their drawdowns will be quite a bit worse than IG bonds though (especially in real estate busts). In the past I even raised the possibility that investing in IG corp bonds could be pretty much the same as a 'balanced' portfolio/risk parity strategy. The difference is that it isn't as robust against inflationary bursts. But if the duration is kept lowish (but not too low) then there is some inflation protection as interest rates adjust higher. Looking at IG bonds returns, it resembles a risk parity type allocation quite a bit Where is this relevant? Well, sometimes you want to help someone and make a recommendation but to explain to someone what is a balanced portfolio and talk about standard deviations will drive them to sleep, but recommending a IG bond ETF is a lot easier. So I'm calling this the 'instant' risk parity
But there are broader implications as well. Hedge funds have access to some really cool products, they can sell credit default swaps on IG grade bond indices. So this creates the possibility of using derivatives to increase leverage. A cool portfolio booster could be to be invested 115% in a specific low risk portfolio but put an extra 15% in IG corporate bonds with the extra 15% coming from sales in CDSs. It would be great if there was a futures market for it but there isn't, CDS is the next best thing. There is also the possibility of using options, through deep ITM calls. Effectively this would finance the IG bond position by the 1-2 year swap rate/libor but get paid the IG bond interest rate, so there is a spread there I remember looking at this in early 2016 but decided against it as I thought the liquidity in the options were quite poor. I ended up missing a good rally there but if someone knows a great way for retail to implement this sort of trade, I'm all ears
Of course, if one is allowed to add another asset class then building a holy grail to recommend to someone becomes easier. It would probably be 85% in IG bonds and 15% in Gold. Give or take 5%. That would fix the inflationary weakness in IG bonds and further boost the Sharpe/Sortino of the portfolio. Even in events like 2008 (where IG bonds faced some mark to market setbacks) that gold would have helped and turned a losing year into a positive one. In the Great depression and in the 70's, same thing US investors have it so much easier, there are like dozens of ETFs that give a diversified exposure to that. In my country there is very little going on in terms of corporate bond ETFs
That's where all the work in building a low risk portfolio pays off. You put hedges in place (or a basket of hedges), you assign appropriate allocations to each investment class, you diversify among pools of beta/alpha assets. You do https://en.wikipedia.org/wiki/Robust_optimization All of that will ENABLE one to take on some modest leverage and juice returns while still keeping risks lows. You will still quite a bit protected against tail risks so the levarage won't be a problem if there is a big issue in the market but the vast majority of the time, you will make that extra 1-2% a year