George Soros Discusses His Portfolio From 2008 ~ market folly

Monday, February 2, 2009

George Soros Discusses His Portfolio From 2008

Hedge fund manager and legendary investor George Soros recently penned an article in the FT, detailing how the markets played out in 2008 when Lehman Brothers was allowed to fail. In the article, there is also a section entitled 'The Soros Investment Year,' where he details how his portfolio played out over 2008. He writes,

"Positions I took were too big for ever more volatile markets.

Although I positioned myself reasonably well for what was coming last year, one thing I got wrong cost me dearly: there was no decoupling between markets of the developed and developing worlds.

Indian and Chinese stocks were hit even harder than those in the US and Europe. Since we did not reduce our exposure, we lost more money in India than we had made the year before. Our Chinese manager did better by his stock selection; we were also helped by the appreciation of the renminbi.

I had to push very hard in my macro-account to offset both these losses and those incurred by our external managers. This had its own drawback: I overtraded. The positions I took were too large for the increasingly volatile markets and, in order to manage my risk, I could not go against the market in a big way. I had to try to catch minor moves.

That made it difficult to maintain short positions. Although I am an experienced short-seller, I got caught several times and largely missed the biggest down-draught, in October and November.

On the long side, where I stuck to my guns, I lost an enormous amount of money. I was impressed by the potential in the new deep-water oilfield in Brazil and bought a large strategic position in Petrobras (PBR), only to see it decline by 75 per cent at one point in time. We also got caught in the developing petrochemical industry in the Gulf.

We did get out of our strategic long position in Vale (RIO), the Brazilian iron ore producer, in time for the end of the commodity bubble and shorted the other big iron ore groups. But we missed an opportunity in the commodities themselves – partly because I knew from experience how difficult it is to trade them.

I was also slow to recognise the reversal of fortune for the dollar and gave back a large portion of our profits. Under the direction of my new chief investment officer, we did make money in the UK, where we bet that short-term interest rates would decline and shorted sterling against the euro. We also made good money by going long on the credit markets after their collapse.

Eventually I understood that the strength of the dollar was due not to people choosing to hold dollars but to their inability to maintain or roll over their dollar obligations. In a very real sense the strength of the dollar, like the fever associated with sickness, was a measure of the disruption of the financial system. This insight helped me to anticipate the downturn of the dollar at the end of 2008. As a result, we ended the year almost meeting my target of 10 per cent minimum return, after spending most of the year in the red."

Its interesting to see Soros speak about his portfolio so freely, as it gives you a rare look inside how a hedge fund manager's portfolio played out over a yearly time-frame. When we covered Soros' portfolio holdings, we had noted his large stake in Petrobras (PBR), one which he was immediately underwater on. We've also noted that he has been building up a large stake in fertilizer player Potash (POT) to coincide with his bullish stance on agriculture. It sounds as if he has stuck with his position, but we will see when the latest SEC filings come out here in the next few weeks.

Soros has been omnipresent in this crisis it seems, sharing his take on the current markets and what has happened. In fact, he's even written a book about the current financial landscape entitled, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. He sees vast problems with the financial industry and also sees a contraction in the hedge fund industry underway.

To further understand how Soros' mind works, we'd highly recommend reading his book, The Alchemy of Finance by George Soros. In it, Soros details his decision making process behind investing in the financial markets. Paul Tudor Jones has said that this book is, "a timeless instructional guide of the marketplace." In addition to covering Soros on the blog, we've also covered his old Quantum fund partner Jim Rogers' thoughts over the course of the year. He likes agriculture and commodities going forward on the long side. On the short side, he likes the US Dollar, the British Pound, and long term treasuries.

If you're unfamiliar with Soros or would just like more of his thoughts, head over to our post on hedge fund manager interviews. And, here is the link to his January 28th article in the FT.

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