George Soros, The Art Of Arbitrage & A Time-Sensitive Opportunity
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George Soros is most certainly persona non grata in the corridors of the Bank of England.
At least not since that now-infamous Wednesday, 16th September 1992.
Wikipedia now refers to this date as Black Wednesday.
But what exactly did George Soros do to warrant such a notorious place in financial history?
Well, Soros, according to himself, made $2 billion that Wednesday (equivalent to $4.5 billion today). The Bank of England, on the other hand, lost $6 billion—or $13.5 billion in today’s terms.
In the months and years leading up to that fateful Wednesday, Soros observed that the British pound was overvalued—not because of economic fundamentals, but due to the interventionist policies of the Bank of England, which was attempting to maintain a strong currency as part of its agreement with other European countries (known as the European Exchange Rate Mechanism, or ERM). Soros believed that the Bank of England couldn’t afford to keep interest rates artificially high to support the pound’s value, a policy that was putting undue strain on the economy.
Soros began betting that the pound would drop in value and started short-selling it in massive quantities.
He borrowed pounds and sold them for stronger currencies like the Deutsche Mark. If the pound fell as Soros anticipated, he could buy back pounds at a lower rate, repay his loans, and pocket the difference.
As Soros (and other hedge funds) increased their short position, the pressure on the pound grew. He reportedly bet roughly $10 billion against the pound (about $9 billion of which was borrowed).
Despite the Bank of England’s efforts to intervene by raising interest rates and buying up pounds to prop up its value, the market forces driven by Soros and other traders proved too powerful—and too costly. Ultimately, on that infamous Black Wednesday, 16th September 1992, the UK government capitulated, exited the ERM, and allowed the pound to float freely.
The pound’s value plummeted, and Soros walked away with a $2 billion profit. The defence of the pound cost the government (and by extension, British taxpayers) some $6 billion.
So, what does George Soros and the pound have to do with the price of fine wine?
Not much, honestly. I was almost tempted to tell you a story about how I used to buy packets of Pokémon cards in Year 5 and sell individual figurines at a markup to classmates during break times instead.
In both cases, we are talking about arbitrage.
"Arbitrage is the art of exploiting inefficiencies in the market before others see them."
— George Soros
Arbitrage is finance’s Moby-Dick because it’s about exploiting price discrepancies risk-free. It’s what’s called a “free lunch,” and it’s exceedingly rare, especially in efficient financial markets.
In theory, arbitrage is supposed to be risk-free—unlike investing in a stock where you expect long-term appreciation. It’s like buying 1 share of a stock on one exchange for $120 and simultaneously selling it on another exchange for $160, netting a $40 profit—risk-free.
It’s an opportunistic trade, with no bearing on the underlying asset other than, in that case, its being differently priced in separate marketplaces.
Of course, in reality, this rarely happens. For one, there are still currency and timing risks involved. Second, transparency and liquidity make it highly unlikely for such a large discrepancy to exist.
Arbitrage thrives on inefficiencies.
In Soros’s case, it was an interventionist Bank of England that couldn’t justify its peg to the Deutsche Mark.
In my Pokémon case, it was the limited resources of Year 5s and their high demand for a few rare figurines.
And as you know, fine wine is rife with inefficiencies…
Enter .
Sometimes, disruption in an industry comes from outsiders.
I consider myself one.
In the case of , we’re talking about a software developer and a data scientist who developed a system to pull fine wine pricing data from 40 different sources, exploiting inefficiencies in the fine wine market.
And there are many.
The essence of what they do is that their system tracks the same wine across various merchants to see if two are selling it at significantly different prices.
If they find a discrepancy of 10% or more—enough to cover transaction costs and account for risks—they buy from the lower-priced merchant and sell via the higher-priced one.
The inherent risk is that selling is not always guaranteed. Most of the time it has to do with the delivery time between warehouses.
For example, I recently tried to exploit a trade, but the wine merchant with the live bid requires the wine to be in their warehouse before I could accept the bid. The bid is still open, but the wine hasn’t yet arrived in storage, so I haven’t closed it yet. And maybe the bid will not be there by the time I can accept it.
Now, are sharing their knowledge with the world—and specifically with the fine readers of In The Mood For Wine.
Today’s arbitrage is one that I have personally handpicked for you.
First and foremost, we’re discussing four wines, but we are not really focused on their intrinsic qualities. In other words, we’re not buying and selling these wines based on their merits or long-term appreciation potential, but rather because we’ve identified a price discrepancy across two marketplaces. Therefore, I won’t go into the specifics of each wine’s attributes.
Purchase Price and Initial Costs
Wine Cost: We’re purchasing from Hatton & Edwards to meet their £500 minimum order with the following selection:
Shipping & Transfer Costs
Shipping to Warehouse: After purchasing from Hatton & Edwards, the wines need to be transferred to the Cru World Wine bonded warehouse.
Cost: £11+VAT (= £13.20)
Listing and Selling Fees on Cru World Wine
Take the Bids: Once the stock is in their warehouse, you can accept the following bids:
Commission Fee: Cru World Wine charges a 5% commission for sales through their marketplace. In this case, it would amount to £42.
Net (Estimated) Profit
Estimated profit: If executed successfully, the estimated net profit on this trade is £106, representing a return of 15.3%.
And finally, remember: driven by supply and demand, these inefficiencies don’t last long.
Thanks, as always, for being here.
👋 Sara Danese
P.S.: If you want to see more of these deals, let me know in the poll below or by hitting reply.
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Disclaimer: The content provided in this article is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any financial product or investment. The value of fine wine investments may go down as well as up, and you may not get back the original amount invested. Past performance is not indicative of future results. Any opinions expressed are those of the author and are subject to change without notice. You should seek advice from an independent financial adviser if you have any questions regarding the suitability of any investment. 'In the Mood for Wine' is not regulated by the Financial Conduct Authority (FCA) and does not provide regulated investment services.