Famous Short Sells: George Soros and Simon Cawkwell


Q.: Are there any famous examples of short-selling?

A: In September of 1992, one of the founders of the first hedge funds, George Soros, "shorted" sterling by risking $10 billion that the value of the currency would fall. He turned out to be right, and in a single day the trade generated a profit of $1 billion and was said to have "broken the Bank of England" when, as a result of his trades, the bank was forced to devalue the currency and withdraw it from the European Exchange Rate Mechanism. His profit eventually reached almost $2 billion.

Another famous figure in the UK is Simon Cawkwell, a trained accountant in his sixties, nicknamed 'Evel Knievel' because of his daring financial gambles. He is one of the so-called financial vultures. Cawkwell claims to have made more than a million pound profit from short-selling on Northern Rock in 2008 and made his name shorting Robert Maxwell's Maxwell Communication Corporation and Polly Peck International which went out of business in the early 1990s.

Q.: $1 billion - that sounds good. But are there any risks?

A: Yes, definitely - shorting is not for the faint-hearted. Most of the time the share market rises, hence shorting is both difficult and dangerous; there's an unlimited risk that prices could rise and, if that happens, it's gets very expensive - you have to buy back the assets at whatever price is available.

 

Q.: I may try to short FTSE at some point and pray that the 4th wave will come!


But i'm a bit concerned that the Fibonacci resistance and support are too far away...

A: It is the 5th wave that you're praying for! If you don't like the spread between support and resistance on the FTSE i.e. next support is 4200 and previous resistance was 4645 (also a fibonacci level on 2003-2009 chart). This means that if you were to go short at a break of the next support your stop is 445 points away with a potential loss of £445 even at the minimum £1 per point. You can reduce your exposure to a more comfortable level by trading ISF which is one tenth of the FTSE. So minimum exposure on the ISF is £45 at £1 per point using same support and resistance levels. Note that trading the ISHARESIFTSE100 doesn't reduce the volatility per se - it is a way of trading the FTSE without the required margin needed for the FTSE implying that if you wanted to trade between a trading range of 500 points it could be done with 10th of exposure.

I also trade IUSA as a better alternative to S&P500. The benefit of trading the IUSA is that you are trading in a constant currency GBP.

Note that not all providers offer the ISF.L (ISHARESIFTSE100 ISHARES FTSE 10) - my provider for instance loathed to put it on and came out with all sorts of jibberish saying the indices are there preferred route to hedge etc. They also stated that the margin on ISF is 30% compared to 7% on indices. He also stated is that is very difficult to borrow so if going short there will be additional stock borrowing costs. Get the feeling they don't want me to use it ;)

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Shorting the FTSE - It is the 5th Fibonacci wave that you're praying for not the 4th wave!


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