A member asked:
In the example you give of the market trying to trigger Julian Robertson’s mental stops in Oct 1998, how does the market know his fund has such a postion in the first place?
Well, there are several ways that the market can know. Not everyone knows. For example, there may be some insignificant players that may not know, but they are insignificant, so they are irrelevant anyways.
The important market players know what is going on – some of the time.
General reasons include:
1. They can gather information about any hedge fund that places multi billion dollar orders in the currency market. How can they gather this info? Well, when Robertson’s Tiger fund calls up the bank fx desk and asks to buy a few hundred million or billions of dollars, and they do that to five different fx trading desks, word gets around. Word spreads. People start asking what is going on? The amount of hedge funds that run such large positions in the market is very small. Back then it was less than 10 hedge funds. So the market can attempt to keep tabs on them. The bank traders can call around other desks and try to piece together the puzzle. It was the same thing with George Soros’s Quantum Fund. When he was placing a big trade to short the GBP during Black Wednesday, a lot of the bank trading desks knew about it. They see these big orders going through and start wondering what is going on.
2. I believe that Julian Robertson in the summer of 1998, sent a letter to his investors indicating that he would short the JPY. When a hedge fund releases these letters to investors, they usually leak to the public. So other people can read those letters and see that he wanted to short the JPY. Then the next question you can ask is, well how do they know how big of a position they have on? Well they don’t always know the exact amount. But they can use the methods I talked about above. Also, they can use some common sense. If Julian Robertson is running $20 billion dollars, then if he only has on a $1 billion dollar position, its kind of meaningless. It won’t make a meaningful impact in the portfolio performance. So in order for the position to make an impact in the portfolio, it has to represent a larger chunk of capital – say $5 billion or $10 billion, etc.
A similar situation happened to George Soros during the Thursday of the week of the 1987 stock market crash. Soros had on a $1 billion long S&P futures position. The S&P closed at 258 on Wednesday. Soros was scared that the market would go down and he wanted to reduce leverage. So he put in an order to liquidate his whole $1 billion S&P futures positions during the market open the next day on Thursday. Soros was able to sell part of his position at decent prices, but then the market figured out that an elephant was selling. The market believed that Soros’s mental stops were triggered, and that he would dump more, so there weren’t any big bids in the market. So part of his order got filled when the S&P cratered to 195.
Think of that! The S&P was at 258 at the close of Wednesday. Soros got a fill on part of his position at around 195 – 200 on Thursday. That is an almost 25% gap! Imagine if the S&P were to gap 25% tomorrow. That would be insane volatility.