[00:03] trade broke down an entire currency system. And there are oil traders who made an absolute fortune when Saddam invaded Kuwait. In this video, we are going to be discussing the most profitable trades in all of history. My
[00:18] name's Alex. I started my career as a quantitative trader on Wall Street. Learning history. History always repeats itself. That's what they say. But learning how to think like these top traders and top hedge funds, going
[00:31] through [music] some historical examples of how people timed their trades, of how they sized their [music] bets, is extremely useful for new traders who are financial markets, whether you're looking at crypto, options, equities,
[00:48] [music] whatever it is. So, without further ado, let's get into some of the biggest trades in modern-day history. So the first trade we are going to discuss is a currency trade. I'm going to be talking in this video about trades
[01:01] from different asset classes, commodities, derivatives. But the first trade was a currency trade extremely famous. George Soros and Stanley Ducken Miller made over a billion dollars in one day shorting the British pound. For
[01:15] all of these trades, I'm going to try to give some context. Why did they like the trade? How did they actually implement the trade? What were their risks? As a little bit of context for this specific trade, in the early 90s, Britain's
[01:28] currency, the pound, was tied exchange rates with other European countries, namely Germany with the Deutsch mark, they had to fall within a certain range. they had to fall within a certain range. So this really tied the hands of the
[01:41] Bank of England where even if it wasn't in the best interest of Britain's economy, they had to buy up pounds and keep the pound overvalued, raise interest rates even if it wasn't in the best interest of the economy. So in
[01:55] 1992, what Soros and Den Miller what they kind of identified as Britain was in a recession is this is unsustainable. We cannot have rates this high. Our currency is essentially way overvalued. The Bank of England is being forced to
[02:11] buy up billions and billions and billions of dollars worth of pounds to keep on this erm system where exchange rates fall within a certain range. And they either thought the pound would devalue or Britain would just leave the
[02:26] ERM, leave this fixed exchange rate system and that would cause the value of the pound to fall dramatically. And that's exactly the bet they put on. So this was completely a macroeconomic a political trade when Britain's economy
[02:43] wasn't doing well. So the way that they did this is essentially they shorted the British pound and got long marks, Germany's currency. And the way that they did this is they took out a loan in pounds. they would convert that loan
[02:57] into marks and then they would just wait with the ultimate goal being if the value of the pound dropped relative to the mark they would be able to repay the loan at a lower rate in profit. So the day when everything went crazy was black
[03:11] day when everything went crazy was black Wednesday September 16th 1992. Soros and Draen Miller had a position of about $10 billion shorting the pound and the British pound was still trading in the bottom of where it could in this erm
[03:25] trading band. The Bank of England had already spent billions and billions of dollars buying up pounds to try to keep it to this peg. So then other speculators, other participants started to load into the same trade, shorting
[03:40] the pound. They believed it was completely unsustainable. So initially the Bank of England tried to jack up interest rates from 10% to 12% then to 15% to attract capital but the market realized this was not sustainable. It
[03:54] would completely crush the UK economy long term. People kept shorting the pound and ultimately the Bank of England was like we can't spend more money defending this peg buying up pounds. It's horrible for the economy to have
[04:08] interest rates this high. So they abandoned it. They abandoned the ERM trading ban and the British pound within just a few days fell 15% versus the German mark and again that was great for Soros and Draen Miller and 25% against
[04:23] the US dollar. So the pound just got absolutely crushed. Interest rates came back down and ultimately it was a great thing for the UK economy with lower interest rates. It kind of got back to growth. Soros and Draen Miller made like
[04:37] a billion dollars in a day which was absolutely insane. The exact profit I don't think is actually known. And the Bank of England lost a ton of money on the trade. So very interesting. You know, this kind of showed that trading
[04:50] macroeconomic events, politics can be extremely lucrative and really was probably one of the biggest trades of all time. But without further ado, I which is not a currency trade, but actually a trade on mortgages. So the
[05:08] next trade which is extremely famous from the movie the big short if you haven't seen it. It is John Pollson credit default swaps in shorting the credit default swaps in shorting the housing bubble. So he made $15 billion
[05:21] on this trade. I think his hedge fund to be clear and I believe that was the most profit a hedge fund at the time had ever made in a year. And him personally he made $4 billion. Absolutely insane trade. So what is the premise of the
[05:35] trade? How did it work? In the early 2000s, banks were giving out mortgages, loans, to basically anybody. You could have horrible credit. You could basically be broke, and you could probably get a mortgage to buy a house.
[05:48] And a lot of these mortgages had adjustable rates or teaser rates. So, the first year, you don't pay as much interest as the following years. So, why didn't banks care if they were giving out crappy mortgages? A lot of people
[06:00] sense. And basically what they did is they packaged all these mortgages together into mortgage back securities or CDOS's uh collateralized debt obligations that were viewed to be relatively safe investments. Rating
[06:14] agencies said they were very safe and then they sold them, right? They sold them to other people. So what John Pollson kind of realized is once these adjustable rates start to kick in, a lot of people are not going to be able to
[06:27] pay off their mortgages and these bonds that are viewed as very safe investments, they're going to go bust. So what he started to do is buy credit default swaps on the worst securities, right? The mortgage back securities that
[06:41] were filled with the most crap, the most subprime crap because he realized a lot of these mortgages, right, are going to go bust. people are not going to be able to pay back. These bonds are going to blow up and basically be worthless. And
[06:55] I can buy insurance on that through [snorts] a credit default swap. So essentially, these credit default swaps, they have massive upside. It's literally like buying insurance. You know, you may buy fire insurance, you pay a little bit
[07:09] a month every single year, and if your house burns down, you get a ton of money, right? You get like $500,000 or whatever your house costs. So, it's the same thing with credit default swaps. You're basically paying a small amount
[07:21] of premium, a little bit of insurance money, and then if things go crazy and these safe bonds blow up, then you make a ton of money. So, he had very asymmetric returns, which was the same thing in the Soros trade, right? So,
[07:36] George Soros when he was shorting the British pound, overall his riskreward profile was pretty good. If the Bank of England left, right, if they left essentially the the cap they had on
[07:50] exchange rates, the pound would go down in value a ton and he would make a lot would lose a ton of money aside from paying the cost of carry, things like that. And it was the same thing here for John Pollson, right? He didn't actually
[08:04] buy $15 billion worth of credit default swaps. However, if you buy insurance on these notoriously extremely safe assets and they go bust, you know, some of his credit default swaps paid out 30 to 50 what he paid for them. So, when people,
[08:20] you know, essentially stopped being able to afford afford their mortgages, a large percentage of these mortgage bonds went bust and he made an absolute killing. I mean, $15 billion for his hedge fund, $4 billion for himself
[08:34] personally. absolutely crazy because Wall Street at the time was built on a house of lies selling these mortgage back securities and saying they were safe when they were full of absolute crap. Loans to broke people who had
[08:49] horrible credit who didn't even understand that once the adjustable rates kicked in, they were going to have to start paying a lot more money and they couldn't afford it. So, that trade absolutely mind-blowing. If you haven't
[09:01] seen The Big Short, it's a great movie. It's really funny, too. So, I recommend watching it. But, you know, crazy. And what you'll notice about both of these trades, you know, from George Soros to John Pollson is they're finding things,
[09:15] right, that the rest of the market doesn't believe. They're finding things early. They're questioning the system. Essentially, these bonds were viewed as very safe. And a lot of people just assume what the rating agencies say,
[09:27] that's true. That's fact, right? If the rating agencies say this is super safe, then it's super safe. John Pollson questioned everything. Why are they safe? Let's actually look into these mortgages. Let's see how they're
[09:40] mortgages. Let's see how they're structured. You know, as a trader, as a great hedge fund manager, you are constantly looking for inefficiencies. You are questioning everything about every type of product and you are
[09:52] aren't seeing. If this was obvious at the time, everybody would have done it. Every single person would have bought these credit default swaps on mortgage back securities. Hindsight's always 2020 and at the time it wasn't so clear. So
[10:06] with all these trades, typically people are thinking very deeply about something. They're identifying structural issues and things other want to get stuck on my little tangent
[10:18] forever. So let's get into the third trade. So the third massive winning trade was Paul Tudor Jones and Black Monday. So Black Monday is the worst day in S&P 500 history. the market crashed over 20% and Paul Tudor Jones
[10:33] unsurprisingly was short. So he was short futures and the reason he used futures is because of leverage. You can typically get about 20x leverage. So $5 million controls $und00 million of exposure. And he was also long put
[10:49] options. So put options, I've made a bunch of videos on this YouTube channel about options. I used to be a a derivatives trader on Wall Street. So, I traded tons of put options is a put option is essentially you're making a
[11:02] bet. You're making a levered bet on a stock to go down or an index or a commodity. You can buy put options on all sorts of assets. So, in 1987, Paul Tudor Jones looked at a graph of the market which was euphoric at the time.
[11:17] market which was euphoric at the time. It was just going up. The market in 1987 by the time you hit October was up over 40%. However, he realized this looks 40%. However, he realized this looks exactly like 1929, the last stock stock
[11:30] market crash. So, interest rates were rising, inflation risks were rising, and Paul Tudor Jones started to think this is a bubble. The market has to crash is a bubble. The market has to crash eventually. And he also realized that a
[11:44] lot of funds were using early versions of the quant stop-loss. So, essentially, they start selling to minimize losses once the market starts selling off. So he realized if the market starts going down, there's going to be rapid selling
[11:58] and the market could really, really, really go down. So all of that paired together led to his decision to buy put options and then to short futures on the S&P 500. And again, he couldn't have timed this trade better. In the first
[12:13] few days of October, the stock market started to go down. So his fund, you know, started to make some money. His fund was returning capital because they were short the market. But he he just kept doubling down. He would add to his
[12:26] position and he continued to add to his position until Black Monday when the stock market crashed over 20%. And on that day, unsurprisingly, he was long puts. He was short futures. He made an absolute killing. Once again, this trade
[12:41] kind of had an asymmetric riskreward ratio. Paul Tudor Jones was only risking you know 5% that's the estimate of his fund with a riskreward ratio of 20 to
[12:53] 30. So very similar to George Soros where the size of the bet was upside was massive. If you were right if Paul Tudor Jones was right about stocks being overvalued all these risks in the market inflation interest rates and then also a
[13:08] spiral where where selling could just rapidly rapidly happen with these quant stop- losses. If his thesis was right, his reward was massive, but his risk was only a small percentage of his fund. So, unsurprisingly, with all these massive
[13:23] winning trades, that's what these hedge funds are looking for. They want to take bets that are cheap, where they're only risking a little bit of their fund for massive upside potential where they could make an absolute killing, which
[13:36] was the case in the great financial crisis, the housing crisis, the housing bubble, you know, with John Pollson, as we talked about with credit default swaps having massive upside, but you're only paying a small premium for that
[13:48] insurance. So the fourth massive winning trade was in commodities was the 1990 Saddam invading Kuwait oil trade and Paul Tudor Jones was in on it once again
[14:00] as well as Andy Hall from Solomon Brothers got very famous, made a ton of money from it. In the mid 1990s, oil was very cheap. Iraq just coming out of a war with Iran was in debt and they were super annoyed that Kuwait was
[14:14] overproducing oil. So some traders started to speculate that Iraq may invade Kuwait and cause a massive oil shortage which would cause the price to spike. So traders started getting long futures such as Andy Hall, Paul Tudor
[14:29] Jones as well as long call options. So the opposite of a put option that we talked about previously. A call option is a bet on an asset in this case rising in price. Most investors thought that, you know, Iraq invading Kuwait was a low
[14:46] probability event. It was [snorts] really just Saddam posturing. He wasn't actually going to do it. But once he did invade Kuwait, about 5 million barrels every single day of oil production was wiped off the map. Prices spiked.
[15:01] Traders who were in on the trade, long call options, long futures made an absolute killing. So this shows you once again how asymmetric risk the the probability of oil going down in price massively and losing a lot of money was
[15:16] quite low. Oil was already very cheap. And if this you know at the time seemingly low probability event, Iraq invades Kuwait that cuts into oil production. This low probability event, if it did happen, the payoff would be
[15:31] massive. And the traders who ended up betting on it like Paul Tudor Jones and Andy Hall, they made a ton of money. You see these massive returns, these massive leverage trades essentially, not only in currency markets, also equities,
[15:46] derivatives, and commodities as well. And just having an understanding of the world, the probability of events happening. Most investors rode off Iraq when it happened, traders who thought there was a probability of it happening
[16:03] made an absolute killing. So, I hope you enjoyed this video. I went through four of the biggest winning trades in history. There's a lot more like Bill Aman and Co that I could have gone through, but I decided to go with these
[16:15] four. So, hopefully you enjoyed this video and thanks so much for watching. Like and subscribe to the channel and let me know other video ideas as