Stanley Druckenmiller: The Trader Behind the Soros Pound Trade

Stanley Druckenmiller is an American investor who managed George Soros's Quantum Fund from 1988 to 2000 and is widely credited with spotting the 1992 bet against the British pound that made the fund famous. Before and after his years with Soros he ran his own firm, Duquesne Capital Management, which he founded in 1981 and closed to outside investors in 2010.

His record is regularly described as one of the best in the industry. Figures of roughly 30% a year with no losing year are widely repeated, though they are not from audited public accounts.

Druckenmiller is a macro investor, meaning he trades currencies, bonds, shares and commodities based on views about economies and central banks. Currency traders study him because his best-known trades were in foreign exchange, and because he talks openly about how he sizes positions.

Early career

Druckenmiller started his career at Pittsburgh National Bank, where he rose quickly to run its equity research. In 1981 he left to start Duquesne Capital Management with a small amount of capital. His results attracted attention on Wall Street, and in 1988 George Soros asked him to take over day-to-day management of the Quantum Fund, one of the largest and best-known hedge funds of the time. He kept running Duquesne alongside it.

Black Wednesday, 1992

In 1992 Druckenmiller concluded that Britain could not keep the pound inside the European Exchange Rate Mechanism while its economy was in recession and German interest rates were high. He built a large short position in sterling. When he discussed it with Soros, the story goes, Soros urged him to make the bet much bigger because the risk was limited and the potential reward large.

On 16 September 1992 Britain left the ERM and the pound fell sharply. Quantum is widely reported to have made about $1 billion. Our article on George Soros and Black Wednesday covers the day itself.

Ideas he is known for

Druckenmiller has given many interviews and speeches over the years. A few themes come up repeatedly and are useful to any trader:

• Concentrate when the odds are strongly in your favour. He has said that the way to build long-term returns is to protect capital most of the time and to bet big when you have high conviction.
• Liquidity and central banks drive markets. He pays close attention to what central banks are doing with interest rates and money supply, often more than to company earnings.
• Admit mistakes fast. He is known for changing his mind quickly when the evidence turns against him, rather than defending a losing view.
• Look ahead, not at today. He tries to imagine where the economy will be in 12 to 18 months and position for that, not for current headlines.

The mistake of 2000

Druckenmiller is also open about his biggest error. In 1999 and 2000 he resisted the technology bubble, then bought into technology shares near the top, and Quantum suffered heavy losses when the bubble burst. He left Soros Fund Management in 2000, and has since described the episode as a lesson in emotional discipline: he knew the shares were overvalued but could not stand watching others profit.

That honesty is part of why traders find him useful. Even one of the most successful macro investors fell into the classic trap of chasing a move out of fear of missing out.

How he thinks about currencies

Currencies sit at the centre of Druckenmiller's approach because they react directly to central bank policy and to flows of money between countries. In interviews he has described watching interest rate differentials, the direction of monetary policy and the balance of payments to judge where a currency is likely to be a year or more ahead. A currency backed by tightening policy and strong inflows tends to rise; one weighed down by loose policy and outflows tends to fall.

He has also stressed that the best currency trades often come when a policy is clearly unsustainable, as with sterling in 1992. In those moments the market can stay calm for a long time and then move very quickly once the policy breaks. Being positioned before the break, with limited downside if it does not come, is the shape of trade he looks for.

For a retail trader, the practical version is simpler: know what each central bank is likely to do next, notice when a currency is being held up by something that cannot last, and keep position sizes small enough that being early does not hurt.

Closing Duquesne

In 2010 Druckenmiller announced that he would return outside investors' money and close Duquesne Capital, which managed about $12 billion at the time. He said that the strain of meeting his own high standards for performance year after year had become too much. Since then he has managed his own money through a family office and given occasional interviews about markets, central banks and the economy.

Lessons for currency traders

• Look for asymmetry: trades where you can lose a little and gain a lot.
• Size by conviction, within firm limits. Bigger when the evidence is strong, smaller or flat when it is not.
• Follow central banks. Interest rate policy is the single biggest driver of currencies.
• Watch your emotions, especially the fear of missing out near the top of a big move.

Frequently asked

Related reading

• George Soros and Black Wednesday
• Who are the richest forex traders?
• Position sizing for forex traders
• Trading psychology