The period of the Great Moderation, to use Federal Reserve Chairman Bernanke's words, ended in 2007 and ushered in a new era of heightened volatility.
This seismic change mostly destroyed careers on Wall Street, but it also made the careers of people like hedge fund giant John Paulson, who made billions betting against the subprime mortgage crisis.
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As a result, there is a renewed interest in the style of trading that's best described as making huge, concentrated bets by analyzing fundamental economic/business conditions. Most (but not all) of these trades can be labeled as 'global macro.'
Paulson's successful trade also prompted talks about it being the greatest of all time.
IBTimes agrees with this assessment and has compiled a list below of the greatest trades of all time, filling in spots two through ten.
The list also includes explanations of the rankings, which were determined by the importance of the underlying events, how much money the trades likely made, and the difficulty and exclusivity of the analyses.
1. John Paulson's bet against subprime mortgages
John Paulson is the famous hedge manager who correctly predicted the subprime mortgage crisis and profited enormously from it.
His trade made his hedge fund $15 billion in 2007 alone. It propelled him from relative obscurity to stardom and his hedge fund to become the third largest in the world.
Paulson does indeed deserve the title of having made the greatest trade ever.
First, he bet big on the largest economic event of the last 70 years and earned billions doing it.
Second, only a handful (less than 10, probably) of players on Wall Street profited enormously from this momentous event. Indeed, compared to other trades on the list, Paulson's prediction is one of the most exclusive.
Paulson isn't even a global macro trader (his background is in merger arbitrage) so it is highly puzzling but impressive that he came up with such an impeccable and spot-on analysis.
He should also be credited for being bold enough to believe in his analysis and ignore his oblivious Wall Street colleagues.
2. Jesse Livermore's call on the Crash of 1929
Jesse Livermore is a legendary speculator from early in the 20th century.
He is famous for correctly predicting both the 1907 and 1929 stock market crashes. The 1929 stock market crash and the subsequent Great Depression was the most significant U.S. economic event in the 20th century.
For his 1907 call, Livermore made $3 million, which is equivalent to almost $70 million today. After his 1929 trade, he was worth $100 million, which is equivalent to over $1.2 billion today.
Like Paulson, Livermore scores points for the high impact of the events he predicted and the amount of money he made.
Furthermore, he made his fortune without the benefit of having a hedge fund (i.e. massive amounts of money from investors) and using fancy derivative instruments.
One last point in Livermore's favor is that he became successful with less educational resources and mentors than modern speculators.
In fact, Livermore is considered a pioneer in the art of speculation and top traders still swear by the Reminiscences of a Stock Operator, a book based on his trading philosophy and career.
3. John Templeton's foray into Japan
Sir John Templeton, born in 1912, is a pioneer of the mutual fund industry and a legendary investor.
In the 1960s, when Japan was beginning its three-decade long economic miracle, Templeton was one of the country's first outside investors. At one point, he boldly put more than 60 percent of his fund in Japanese assets.
Before his brilliant call on Japan, Templeton also correctly assessed the economic impact of World War II, which was the second most important economic event of the 20th century.
In 1939, he put $100 each in 104 U.S. stocks that were trading below $1. In just 4 years, this portfolio quadrupled.
In addition to the fact that he predicted important events, Templeton gets points for being a true pioneer.
Back in the 1960s, people weren't really familiar with the concept of investing in Asia and Japan's export-driven model wasn't yet proven. It took someone of Templeton's ingenuity, courage, and foresight to lead the way.
4. George Soros' breaking of BOE
George Soros put the hedge fund industry on the map in 1992 after he broke the Bank of England (BOE) by shorting 10 billion worth of pound sterling and forcing the U.K. to withdraw from the European Exchange Rate Mechanism (ERM).
Soros made $1 billion in the process, which was an unimaginable sum back then.
Why isn't Soros, probably the most (in)famous trader in the world, and shorting the sterling pound, his most famous trade, ranked higher?
Not to belittle Soros' accomplishments, but the analysis behind it wasn't as difficult as some of the other trades on this list.
Indeed, there were copycats that made the same trade as Soros. Also, far more people recognized the unsustainability of the ERM than those that saw the dangers of the subprime mortgage market.
Moreover, it was Soros' partner Stanley Druckenmiller who came up with the trade idea in the first place. Soros' contribution was agreeing with it and taking a large position.
Still, Soros deserves credit for having the boldness to make the trade. He also gets 'coolness' points for being the catalyst that ushered in a new currency regime for a major country. This level of impact from a single trade is matchless to this day.
5. Paul Tudor Jones' shorting of Black Monday
Paul Tudor Jones correctly predicted and profited handsomely from the Black Monday of 1987, the largest single-day U.S. stock market decline (by percentage) ever.
Jones reportedly tripled his money, making as much as $100 million on that trade as the Dow Jones Industrial Average plunged 22 percent.
In the weeks leading up to Black Monday, many traders were on edge about the market. Some also recognized the danger of portfolio insurance, which was partly responsible for the magnitude of the fall.
Consequently, many had short positions going into Black Monday or advised their clients to get out of the stock market shortly before it happened, so Jones wasn't unique in predicting the crash.
Nevertheless, Jones deserves to be #5 because Black Monday was such a momentous market event and he was the person who made the most money from it.
6. Andrew Hall's $100 oil prediction
Back in 2003, when oil was trading at $30 barrel and the economy had just recovered from the dot-com crash, Andrew Hall wagered that prices would top $100 per barrel within five years.
When oil prices blew past $100 five years later in 2008, Hall's employer Citigroup made a bundle and Hall took home $100 million as a part of his compensation for this and other successful trades.
According to Time Magazine, Hall structured the contracts so that if oil prices didn't hit $100 within 5 years, they would expire worthless.
Therefore, it took a tremendous amount of conviction and probably some brilliant analysis on Hall's part to make that trade.
Traders know it's hard enough to predict the direction of an asset and find a good entry point. What Hall did was actually pinpoint a timeframe and price level of the move.
Hall is known for doing these brilliant (but risky) types of trades. In 2009, for example, he thought spot oil was cheap. However, oil futures were expensive, so he couldn’t buy them. Instead, he actually bought 1 million barrels of real oil and physically stored it.
So while Hall's calls weren't about monumental events in history, he makes up for it by his brilliance and creativity.
7. David Tepper's 2009 bet on financials
In early 2009, David Tepper bought severely depressed shares of big banks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C). By the end of 2009, Bank of America quadrupled in value and Citigroup tripled in value from their bottoms earlier in the year.
That was good enough to earn Tepper's hedge fund $7 billion. His personal cut was $4 billion.
Tepper's background is in investing in distressed assets and that's exactly what he did in his biggest score to date.
In early 2009, everyone knew Bank of America and Citigroup shares were cheap, but they were too afraid to buy because, among other concerns, they were afraid that these banks would be nationalized.
Tepper bet they wouldn't be. While this trade seems like a wild gamble, Tepper's excellent track record in distressed investing proves otherwise.
A more likely explanation is that Tepper kept his cool while everyone else lost theirs with worries about a coming depression, a collapse of the global financial system, and other 'the-world-is-ending' scenarios.
What's not so impressive about Tepper's trade is the caliber and exclusivity of the analysis because everyone knew about the factors at stake, i.e. whether big banks would be nationalized.
But Tepper deserves credit because he did what one else dared to do and made a lot of money doing it.
8. Jim Chanos' prescient shorts
Jim Chanos is the best short-seller in the world.
He correctly predicted, and profited enormously, from the demise of Enron. Other examples of his successful shorts include Baldwin-United, Tyco International (NYSE: TYC), Worldcom and recently homebuilders like KB Home (NYSE: KBH)
Chanos started to look into Enron as early as 2000. When he found red flags, he dug deeper, discovered more discrepancies, alerted the media, added to his short position, and eventually got rich when the Enron scandal was revealed in October 2001 and the company went bankrupt.
The Enron scandal was highly impactful because it was the biggest bankruptcy to date, led to the dissolution of accounting firm Arthur Andersen, and brought about new regulations like the Sarbanes-Oxley Act.
In a way, Chanos' short of Enron is like a miniature version of Paulson's short of the subprime mortgage market; both reached strongly held convictions by painstaking and thorough research and very few people were aware of the landmines these traders discovered.
Chanos is now setting his sights on China because he believes its economy is just a giant bubble.
There are limited ways he can short the Chinese economy, so Chanos won't make as much money as Paulson if he turns out to be right. However, if he is indeed right, he would cement his status as one of the most brilliant analysts of all time (and this list would be revised to reflect that).
9. Jim Rogers' early call on commodities
Jim Rogers spotted the secular bull market for commodities way back in the 1990s. In 1996, he created the Rogers International Commodity Index. Subsequently, he worked on ways to make that index investable.
Since 1998, the index has returned 290 percent through the end of 2010. This compares to the 10 percent return of the S&P 500 Index during the same period.
Rogers expects commodities to continue to rally ferociously for the long term as paper assets become more worthless and demand (for certain commodities) picks up worldwide. If he is indeed correct, the importance of his call will be elevated and this list would be revised to place him higher.
Back in the 1990s, on the heels of a long bear market for commodities, it was difficult to make a bullish case for them. In fact, few people did.
It is therefore highly impressive that Rogers pretty much called the bottom of a market that went on to rally tremendously for the next decade and more.
10. Louis Bacon's geopolitical play
Louis Bacon made a killing in 1990 by anticipating that Saddam Hussein would invade Kuwait. Bacon went long on oil, short on stocks, and helped his new hedge fund return 86 percent that year. In the following year, he also correctly bet that the U.S. would quickly defeat Iraq and the oil market would recover.
Aside from the eye-popping returns, this feat is included on the list because Bacon ventured outside the field of finance and correctly anticipated a geopolitical event.
Granted, his analysis likely centered on the financial difficulties of the Iraqi government, so it wasn't entirely outside his area of expertise.
But Bacon's feat was impressive because he likely anticipated the invasion better than the people who are supposed to be good at this stuff, like the U.S. President, director of the CIA, and top government officials of other countries. These government people also had better information and access than Bacon did.