Download PowerPoint 演示文稿 - Tulane University

Quantum Endowment Funds
Group Members:
Kunqi Bai; Heng Zhao; Shengnan Zhang; Zhe Li; Kailai Xu; Benchen
Huang: Junyu Xiao
Agenda
Successful case
Introduction
Invest theory
Successful cases
Failure cases
Current News
introduction
George Soros, born August 12, 1930, is
the chairman of Soros Fund
Management. He is known as “the Man
Who Broke the bank of England”
because of his short sale of 10 billion
worth of pounds, giving him a profit of
1 billion during the 1992 “Black
Wednesday UK currency crisis.”. Also,
Soros is one of the thirty richest people
in the world.
introduction
Soros Fund Management
• Soros Fund Management is a privately held American investment
management firm currently structured as a family office but formerly a
hedge fund.
• The firm was founded in 1969 by George Soros and in 2010 was reported
to be one of the most profitable firms in the hedge fund industry,
averaging a 20% annual rate of return over four decades.
• It is headquartered in New York City.
• In July, 2011, The Quantum fund announced that they would be ending
the fund, and will return all the outside money and exclusively manage
Soros’s family money.
introduction
Quantum Fund
Quantum Fund is one of five funds belongs to Soros Fund Management and
is one of the most famous hedge fund in the world.
· Founded in 1969 with 4 million registered capital.
· 4 years later, Quantum Fund had more than 12 millions.
· All the investors are from outside the U.S. in order to avoid the supervision
of SEC.
What makes Soros and his Quantum Fund so famous?
· Quantum Funds earned 1.8 billion by shorting British pounds and
buying German marks. This famous battle earned Soros the title of
“ the Man Who Broke the Bank of England.”
· In 1997, Soros shorting Thai baht, causing the economic crisis in
Southeastern Asia.
How does it work
Reflexivity

The market is made up of people.

People have a conception of the economic reality (which is inevitably
false or incomplete) and base their actions on these conceptions.

These conceptions then have a feedback loop with "economic
fundamentals"

In certain historical circumstances this feedback loop leads to outcomes
that are initially self fulfilling but inevitably self defeating in a boom/bust
sequence.

Generally this reflexive boom/bust sequence initially builds on a preexisting trend based on sound economic fundamentals.
X=knowledge
Y=action
Y=F1(x)
X=F2(y)
①,②
Y=F1[F2(y)]
X=F2[F1(x)]
①
②
▪Reflexivity
is inconsistent with equilibrium theory.
▪Reflexivity asserts that prices do in fact influence the
fundamentals and that these newly influenced set of
fundamentals then proceed to change expectations, thus
influencing prices.
▪The process continues in a self-reinforcing pattern. Because
the pattern is self-reinforcing, markets tend towards
disequilibrium.
• The market is made up of people.
•
People have a conception of the economic reality (which is
inevitably false or incomplete) and base their actions on these
conceptions.
• These conceptions then have a feedback loop with "economic
fundamentals"
• In certain historical circumstances this feedback loop leads
to outcomes that are initially self fulfilling but inevitably self
defeating in a boom/bust sequence.
• Generally this reflexive boom/bust sequence initially builds
on a pre-existing trend based on sound economic
fundamentals.
a. Lenders began to make more money available to more people in
the 1990s to buy houses.
good?
Thus they lent out more money because their balance sheets looked
good, and prices went up more, and they lent more, etc. Prices
increased rapidly, and lending standards were relaxed.
Increasing lending against appreciating assets without understanding
that one of the main reasons for the increased asset price is the
increased lending.

b. Ever larger numbers of potential investors in
housing markets grew increasingly confident that
house prices would continue to increase based on their
past experience (i.e. adaptive expectations) and thus
scrambled to bid up the prices of houses.

the trend-following habits of investors or speculators
(including adaptive expectations formation).

Unchecked credit expansion

An explosion in the value and type of unregulated
financial instruments (derivatives, leveraged instruments
etc.)

Globalization of financial markets with the financing of
US consumption (private and government) by foreign
lenders (China etc.)
How does it work
Strategy to Arbitrage
A: buy stocks
P
B: short sell
B
A
C: sell stocks
C
t
Quantum Fund VS Quantum Endowment Fund
Higher leverage
Lower risk with lower return
The War with Pound:
Break the Bank of England
Origin of 1992 Pound Crisis
European Exchange Rate Mechanism (ERM)
• Introduced in 1979 with the goals of reducing exchange rate
variability and achieving monetary stability within Europe
• Prepare for the Economic and Monetary Union (EMU) and ultimately
the introduction of a single currency, the euro
• This process was seen as politically driven, attempting to tie European
countries together
• The United Kingdom tardily joined the ERM in 1990 at a central
parity rate of 2.95 deutsche marks to the pound
Origin of 1992 Pound Crisis
The sign of Maastricht Treaty in 1992
• In February 17, 1992, the European Community signed the "Maastricht
Treaty“
• Treaty requires that the European Community countries should complete
the single currency in three phases
• First stage: intensify “European exchange rate mechanism” role to
achieve free flow of capital;
• Second stage: establish a “European Monetary Institute” to coordinate
national monetary policies;
• Third stage: establish a unified European currency (euro) and
found“European Central Bank”for the EU to develop a unified
monetary policy.
Origin of 1992 Pound Crisis
Imbalance economic development in EU countries
• Germany has a prosperous economic due to the integration of East
and West Germany and Germany dominates the economic
development of the whole of Europe
• UK is caught in the mire of recession
• The economic situation in southern Europe, such as Italy, was inferior
to the United Kingdom
• Unified European currency will only exacerbate the economic
imbalance between EU countries
• the UK government was required to keep the pound in a trading
band within 6 percent of the parity rate. An arguably artificially
strong currency in the United Kingdom led the country into a
recession
• Despite a recession, the United Kingdom was forced to keep
interest rates artificially high, in line with German rates, in order to
maintain the currency regime
• These two action can not stimulate the economy and rescue the UK
from depression.
• Meanwhile, Germany was suffering inflationary effects from the
integration of East and West Germany, which led to high interest
rates.
Soros got “the UK economy can not support the strong pound,
pound must devalue in the future” conclusion and took following
specific strategies to make profit:
• Short positions strategy: buy dollars or imminent revaluated
Mark, short selling (borrowing) devalued pound
• Arbitrage strategy: devalued pound may cause serious impact on
the UK financial markets, certain financial assets on the UK
market may temporarily fall below the proper value; buy low and
sell high

September 16,1992, British government was forced to withdraw
the pound from the European Exchange Rate Mechanism (ERM),
which send the currency into a free fall

September 16, 1992 also is called Black Wednesday

$950 million was earned by Soros
Black Wednesday,
September 16, 1992
Figure: Pound/Mark and UK Base Rates, 1992
Sniping Baht in Thailand
Good Side

In the early 1990s, when Western countries were in the stage of
recession, the economy of the Southeast Asian countries
develop rapidly, the economic outlook is very good.
Strategy------- become the New World Financial Center.

relaxed financial regulation, implement the financial
liberalization
The background of sniping Baht
Potential Risk

Economic growth of Asian countries is not based on the rise in
productivity, but mainly dependent on the increase of the foreign
investment.

Target : Thailand, is the most vulnerable to the impact of
international capital

International trade surplus
significantly overestimated
baht exchange rate is
maintain the dollar's exchange rate, sold a lot of foreign exchange
How Endowment Fund made money





Interest rate: Thailand >U.S.
borrow money from the U.S., and then deposited in the
Bank of Thailand
money flowing into Thailand
baht & US dollar exchange rate is fixed
no
depreciation and appreciation
the assumption is 1:25, Soros borrow 250 billion baht from
Bank of Thailand then exchange $10 billion
let
their baht depreciate
Borrow money from Thai banks and buy dollars from Thai
government
resulted in a panic
How Endowment Fund made money

Dollar is so hot all of a sudden, all together to sell baht
and buy dollars

Thai government: not so much foreign exchange reserves,
the dollar has been depleted quickly

floating exchange rate and let the baht
devaluation, only the baht devaluation, the dollar is
enough to sell

sharp depreciation of the baht, from 1:25 to 1:50 , $10
billion worth 500 billion baht
pay back $250 billion
baht and earn $250 billion baht
Timeline of sniping Baht---first battle

In March 1997, when the Bank of Thailand
announced that nine domestic financial
companies and the one major housing loan
company have liquidity shortage problem.

Soros and other hedge funds Managers sell baht
in large amount
Timeline of sniping Baht---first battle
Three tricks---- transaction costs surge, all of a
sudden loss of $300 million

Joint Singapore spent $ 12 billion reserve to
absorb the baht

Prohibit lending

Raise interest rates
Timeline of sniping Baht--- Second battle

In late June 1997, former Thai finance
minister resigned. Soros ordered to sell
bonds to raise funds and short selling again

July 2, the Thai government as a result of
no longer able to compete with George
Soros, implement a floating exchange rate
system.
Quantum Fund
in
Hong Kong
Quantum Fund’s strategies
Stock market
Currency
market
Futures and
Option market
Linked Exchange Rate System
A system of managing a nation's currency
and exchange rate by linking the national
currency to another base currency that is
held at a fixed ratio in deposit at domestic
banks.

Hong Kong Dollar is linked with UD dollar.

In Hong Kong, the monetary regulator is Hong
Kong Monetary Authority (HKMA).
Quantum Fund’s strategies
Short HK
Dollar
Speculators
benefit
Value of
stock index
futures
decrease
•
HKMA: Hong Kong Monetary Authority
HKMA
increase
Interbank
lending
rate
Negatively
effect the
stock
market
Quantum Fund’s strategies
Quantum Fund focus on two markets: currency market and stock market
Currency market
stock market
1
• Borrow the HK dollar from
currency market
1
2
• Exchange the HK dollar to
US dollar
2
• Short the stock index futures
and the stock
• stocks price decrease
•
3
4
• HK dollar depreciate
• Use the dollar to buy the HK
dollar and pay back
3
benefit from the short
position
When the hot money flow into Hong
Kong…
Hang Seng Index (HSI)

10/20/1997
12860

10/21/1997
11700

10/22/1997
10600

10/28/1997
9060
Exchange rate:

10/20/1997 1USD=7.75 HKD

10/29/1997 1USD=7.73 HKD
Reaction of Hong Kong
government
Use foreign exchange
reserve to intervened
currency market
Protect the stock
market by capital
injection
.
Increase the margin of
the stock index by
50%,from 80,000HKD to
120,000HKD.
Request the
registration of holding
more than 250 index
contracts.
Result

Quantum Fund loss 900 million

HK stabilized its Linked Exchange Rate
System, however it went through a 10-year
regression resulted after this crisis.
Per Capital income from 1997 to
2007
Year
Per capital income(USD)
1997
27,055
1998
25,352
1999
24,600
2000
25,144
2001
24,744
2002
24,340
2003
23,428
2004
24,393
2005
26,000
2006
27,466
Quantum Fund In Russia

In 1998, Soros's Quantum Fund Losses in
Russia

Loss:

One of the main reasons Soros ended the
Quantum Fund
Quantum Fund In Russia
Why Quantum Fund invested in Russia?

1995, suggested by QFII, Russia Government
gradually opened up its capital market to
foreign investors.

1997, Russian economy rebounded, GDP had a
positive growth, inflation rate declined.
Quantum Fund In Russia
Why Quantum Fund invested in Russia?
Treasury Bond:
3-6 months
Stock Price low:
$0.5 - $5
Bullish
Annualized Bond
Return>30%
Average Return>100%
Quantum Fund was Bullish on Russian Market
Quantum Fund In Russia
Why lose?- The financial crisis in Russia
In the first half of 1997, the Russian economy showed some signs of
improvement. However, soon after this, the problems began to
gradually intensify. Two external shocks:

The Asian financial crisis that had begun in 1997 and the following
declines in demand for (and thus price of) crude oil and nonferrous
metals, severely impacted Russian foreign exchange reserves.

A political crisis came to a head in March when Russian president
Boris Yeltsin suddenly dismissed Prime Minister Viktor
Chernomyrdin and his entire cabinet on 23 March 1998.
Quantum Fund In Russia
Why lose?- The financial crisis in Russia
On 17 August 1998, Russian government and the Central Bank
of Russia issued a "Joint Statement" announcing, in essence,
that:

The ruble/dollar trading band would expand from 5.3–7.1
RUR/USD to 6.0–9.5 RUR/USD;
 Russia's ruble-denominated debt would be restructured in a
manner to be announced at a later date; and, to prevent mass
Russian bank default,
 A temporary 90-day moratorium would be imposed on the
payment of some bank obligations, including certain debts
and forward currency contracts.
Quantum Fund In Russia
Why lose?- The financial crisis in Russia

The effects of Crisis
Exchange
rate
• Exchange rate had reached 21 rubles for one US dollar,
lost two thirds of its value in less than one month
Treasury
Bond
• Treasury bond price declined to less than 50% of the
face value
Stock
market
• Stock market dropped 75% than beginning of the year
Quantum Fund In Russia

The big loss

When the crisis began, Soros appealed to other western
countries to help Russia, the banks used to support
Quantum Fund refused and ask for early loan payment.

In the crisis, the market broke down, stock, bond, rubledollar were terminated trading once.

Foreign investors lost $33 billion in this crisis.
Current News about Quantum Fund
Return Money to Outside
Investors

Time: 2011

In order to avoid regulation under Dodd-Frank
Act
1.
Not need to register with SEC
2.
Avoid handing over data to the Financial
Stability Oversight Council

Now a family office operating approximately
$25 billion family wealth
Current Performance

Earned $5.5 billion in 2013, best return since
2009 (Financial Times)

Ranked No. 1 hedge fund with the greatest net
gain for investors (LCH Investment NV,2014)

Started to focus on China and warned China’s
rate of credit growth and leverage
The world’s most successful hedge fund

Won the battle against the Bank of England

Generated more than $40 billion to its investors
since its foundation (LCH Investment, 2013)

Annual return is more than 30% (LCH Investment,
2013)