In 1954 Soros began working as a clerk at London-based merchant bank Singer & Friedlander, before eventually being promoted to the arbitrage department. While at the bank, one of Soros’ colleagues, Robert Mayer, recommended Soros for a position at his father’s brokerage house, F.M. Mayer.
Accepting a position as an arbitrage trader at F.M. Mayer meant moving from London to New York, which Soros did in 1956. At the time, he specialized in European stocks when the creation of the Coal and Steel Community, later known as the Common Market, was making those stocks popular with U.S. investors. Having built a reputation in the field, he jumped to Wertheim & Co. in 1959 as an analyst of European securities.
Throughout his time at Wertheim, Soros’ thoughts were elsewhere. His plan at the time was to keep working until he’d saved $500,000, which he deemed would be enough to allow him to go back to England to study philosophy in relative comfort.
During those years, Soros developed a theory he referred to as reflexivity. The idea grew from the philosophy of his former teacher at the London School of Economics, Karl Popper. Soros’ concept was that self-awareness is part of any given environment. That meant the act of creating a valuation in any market would necessarily be reflected in the actions of market participants, creating a virtuous or vicious cycle within the market. Likewise, any prediction could alter how financial actors behave to make a false statement become true, or vice versa.
“It so happened that the concept of reflexivity provided me with a new way of looking at financial markets, a better way than the prevailing theory. This gave me an edge, first as a securities analyst and then as a hedge fund manager,” he would go on to write of the discovery.
“I felt as if I were in possession of a major discovery that would enable me to fulfill my fantasy of becoming an important philosopher...as I delved deeper and deeper into the subject I got lost in the intricacies of my own constructions,” Soros would later write about his work on the theory. “At that point, I decided to abandon my philosophical explorations and to focus on making money.”
It worked. The next year, Arnhold and S. Bleichroeder allowed him to manage an offshore investment fund called First Eagle. Two years after that, capitalizing on the success of Soros’ first fund, the company created a second fund for him, called the Double Eagle hedge fund. It was the fund that would eventually grow into the Quantum Fund.
In 1969, the fund was seeded with $4 million of investor capital, which included $250,000 of Soros’ own money. The Rothschild family and other wealthy Europeans would go on to invest in the funds.
The success of both Eagle funds continued for several years, only to eventually be hindered by federal regulations concerning perceived conflicts of interest on Soros’ part. In response, he quit his position at Arnhold and S. Bleichroeder to create his own private investment company with the Double Eagle Fund.
He renamed the fund the Soros Fund in 1973, with $12 million in assets. George Soros co-managed the fund with Jim Rogers. Over the years, the two men would reinvest their returns from the fund, along with large portions of their annual 20% management fees.
They soon renamed their investment vehicle the Quantum Fund, after the principle of quantum mechanics discovered by physicist Werner Heisenberg. The fund began to deliver legendary returns. Not bound by many of the rules constraining mutual fund managers of the day, Soros had an ability and willingness to short the market during a period defined by crippling inflation and oil shortages. Between 1969 and 1980, the Quantum Fund had grown by a staggering 3,365% versus the 47% the S&P 500 posted.
By 1981 it had $400 million in assets, but that year it hit a stumbling block when it posted a 22% loss after a badly misplaced bet on interest rates. Investors ran for the exits, leaving it with just $200 million in assets. Soros took a year off to step back, handing over day-to-day management of the fund in the meantime. He used the period to examine world politics, monetary policies, and the other forces driving inflation, interest, and currency rates.
The fund did well in his absence, recovering the assets it had lost by the time Soros returned in 1984. Armed with the insights gleaned from his sabbatical, he immediately began making big bets. In 1985, the fund posted a 122% return and added $93 million to his personal fortune.
As the Quantum fund grew, so did his reputation as one of the top money managers in the world. In 1987, Soros took advantage of that reputation to publicize his philosophy. His book, titled "The Alchemy of Finance," described the intellectual underpinnings of Soros’ investment strategy.
By the late 1980s, Soros found his attention increasingly drawn to events in Eastern Europe. He again handed over day-to-day management of the fund in 1989, this time to his protégé Stanley Druckenmiller, who continued to deliver strong returns.
With strong returns and a stronger reputation, Soros Fund Management continued to grow. It reorganized in 1997 as a limited liability company in which Soros, Druckenmiller, and chief administrative officer Gary Gladstein shared control of the firm and the six funds it managed. The firm oversaw roughly $21.5 billion in assets by the middle of 1998.
That success on behalf of clients continued with a few hiccups until July 2011. That’s when Soros, concerned that new S.E.C. disclosure regulations would compromise his clients’ privacy, returned investor funds and invested $24.5 billion of his own money in the Quantum Fund. In 2013, the Quantum Fund, consisting of the Soros family fortune, garnered a return of $5.5 billion.
In Britain, Black Wednesday (Sept.16, 1992) is known as the day that speculators broke the pound. They didn't actually break it, but they forced the British government to pull it from the European Exchange Rate Mechanism (ERM). Joining the ERM was part of Britain's effort to help the unification of the European economies. However, in the imperialistic style of old, she had tried to stack the deck.
Although it stood apart from European currencies, the British pound had shadowed the German mark in the period leading up to the 1990s. Unfortunately, the desire to "keep up with the Joneses" left Britain with low-interest rates and high inflation. Britain entered the ERM with the express desire to keep its currency above 2.7 marks to the pound. This was fundamentally unsound because Britain's inflation rate was many times that of Germany's.
Compounding the underlying problems inherent in the pound's inclusion into the ERM was the economic strain of reunification that Germany found itself under, which put pressure on the mark as the core currency for the ERM. The drive for European unification also hit bumps during the passage of the Maastricht Treaty, which was meant to bring about the euro. Speculators began to eye the ERM and wondered how long fixed exchange rates could fight natural market forces.
Spotting the writing on the wall, Britain upped its interest rates to the teens to attract people to the pound, but speculators, George Soros among them, began heavy shorting of the currency.
The British government gave in and withdrew from the ERM as it became clear that it was losing billions trying to buoy its currency artificially. Although it was a bitter pill to swallow, the pound came back stronger because the excess interest and high inflation were forced out of the British economy following the beating. Soros pocketed $1 billion on the deal and cemented his reputation as the premier currency speculator in the world.