Famous Trades in History

A handful of trades have become legends: bets that made fortunes, broke central banks or embarrassed famous funds. They are fascinating stories, but they are also full of practical lessons about asymmetric risk, conviction, timing and how markets can move far further than anyone expects. They also carry a warning: for every famous winner, many similar bets lost money and were forgotten. Studying them is most useful when you focus on the reasoning and risk management, not just the outcome.

Selected famous trades#

Soros breaks the Bank of England#

In 1992, the UK was in the European Exchange Rate Mechanism, committed to keeping the pound within a band against the German mark. George Soros and Stanley Druckenmiller at the Quantum Fund concluded that UK interest rates were too high for its weak economy and the pound was overvalued. They built a short position in the pound reported at around $10 billion. On 16 September 1992, known as Black Wednesday, the UK raised rates and spent reserves defending the pound, then withdrew from the ERM. The pound fell sharply, and the fund reportedly made about $1 billion. See Central Bank Intervention and Macro Trading.

The Big Short#

Before 2007, John Paulson's firm, along with investors such as Michael Burry, bought credit default swaps on subprime mortgage securities, insurance that paid out if borrowers defaulted. The protection was cheap because markets assumed defaults would stay low. When the housing market collapsed, these positions paid off enormously; Paulson's funds reportedly earned around $15 billion in 2007. The trade was also painful to hold: premiums cost money every month while the housing bubble kept inflating. See Credit Default Swaps (CDS) and The 2008 Financial Crisis.

The Volkswagen squeeze#

In October 2008, Porsche revealed it controlled about 74% of Volkswagen's ordinary shares through stock and options, while the state of Lower Saxony held about 20%. That left very few shares available, but short sellers had bet heavily against VW. Rushing to buy back shares, they sent the stock soaring, and for a brief moment VW became the world's most valuable company. Hedge funds lost billions. See Short Selling.

GameStop#

In January 2021, retail traders coordinating on social media bought GameStop shares and call options, targeting a stock that was heavily shorted by hedge funds. The price rose from under $20 at the start of the month to an intraday high of $483 on 28 January (before a later 4 for 1 split). Melvin Capital, a major short seller, needed a large capital injection and later closed. Brokers restricted buying as clearing deposit requirements surged. See Clearing, Settlement and Custody and Gamma.

The Hunt brothers' silver corner#

Nelson Bunker Hunt and William Herbert Hunt accumulated huge amounts of silver and silver futures. Silver rose from about $6 an ounce in early 1979 to nearly $50 in January 1980. Exchanges then raised margin requirements and restricted new purchases. Prices collapsed, and on 27 March 1980, Silver Thursday, the Hunts could not meet a margin call. See Silver and Market Manipulation.

Lessons#

1. Look for asymmetry: limited downside, large upside.
2. Being early can feel like being wrong; size positions to survive. See Position Sizing.
3. Crowded shorts can squeeze violently.
4. Rule changes can end trades, as margin hikes ended the Hunt corner.
5. Survivorship bias: we remember winners, not the many who made similar bets and lost. See Survivorship and Selection Bias.

Frequently asked questions#

What is the most famous trade in history?#

George Soros's 1992 bet against the British pound is among the best known, reportedly earning his fund about $1 billion.

What was The Big Short?#

Bets against subprime mortgages before 2008 through credit default swaps, made by investors such as John Paulson and Michael Burry.

What happened with GameStop in 2021?#

Retail traders drove a short squeeze, sending the stock from under $20 to an intraday high of $483 in January 2021 and causing heavy losses for short sellers.

Next, learn about the traders behind some of these stories in Legendary Traders.