Bill Lipschutz is a foreign exchange (Forex) market trader, he’s one of those traders who isn’t quite a household name just yet, but he has had a profound impact on the entire world of trading.
“He is the co-founder and Director of Portfolio Management at Hathersage Capital Management. He was also the former Global Head of Foreign Exchange at Salomon Brothers, where he worked from 1981 to 1990.” – Wikipedia
Bill was born in 1956 in Farmingdale, New York. He did well in school and went on to graduate from Cornell University’s architecture program. At Cornell’s business school he also earned himself an MBA in finance. Although architecture was his passion, he found it hard to tolerate the amount of time needed be he could be entrusted with a real design.
I’m sure a lot of us can relate when we took an economics course, but while in school Bill did hypothetical paper trading in a class. Each student started with $100,000, and by the end of the course, he had accumulated $29 million (now that’s without any limits on leverage).
He really started trading when his grandmother passed away. In her will, she left him $12,000 in stocks. This was not a simple portfolio. It consisted of many shares held by many different companies. The difficulty in having to liquidate each of those, coupled with his success in paper trading perhaps pushed him to attempt to trade with real money.
This led him to into the markets during his time at Cornell with his $12,000 inheritance. He would research the market often becoming a huge part of his approach to trading. An essential skill for any trader which just came naturally to Bill. He finished his MBA in the pre-internet days of 1982, so of course, back then, research meant hitting the library and reading books. It makes modern trading research look much easier.
Over four years while attending university, Bill managed to turn his $12,000 into $250,000 or over 2000% growth! Bill explains much of this story in the book The New Market Wizards: Conversations with America’s Top Traders. The interviewer asks him what happened to his $250,000. Bill mentions the “Granville reversal” in September 1982.
The Granville Reversal, named after the famous market advisor Joe Granville, describes the reversal that took place at the bottom of the bear market in September 1982.
The advice of Joe, to his newsletter readers went against Bill’s long position, and he lost nearly his whole account in under a week when many people moved the market against him. The interviewer asks if this had affected his confidence, Bill states merely he saw it as “one major mistake”. He explains that he has always been confident as a trader and remained that way and that sharpening his skills led to his job at Salomon Brothers.
In 1982 Bill was hired to work at Salomon Brothers, a Wall Street investment bank. It was there where Bill really established his legacy as one of the most successful Forex traders of all-time. Yes, just before losing his personal trading stake which affected Bill permanently. After his loss, Bill vowed to never trader his own money at the same time he was trading other’s money professionally.
Salomon Brothers created their own insular devoted culture. It brought up its own traders from scratch and taught them how to succeed. Though it might sound odd, they did the same when it came to adding a foreign exchange department. What is strange is that most firms would have hired someone from outside Salomon who was an expert in currency trading. Instead, they just asked on of the higher up people from their bond arbitrage department to head the new FX department, even though he was utterly naive to Forex.
What is strange for most might be an opportunity for others, such as Bill. The stars aligned for him so that he could make his name in a new-growing department that he knew a lot about. Bill was also the only person there who had experience in options trading, which was just starting to become widely known in the world of trading.
One of the stories of his time at Salomon Brothers involved another one of the most successful Forex traders known as Andrew Krieger or Andy Krieger. Bill and Andy spent the day on international phone lines while Andy was sick and made $6 million trading the New Zealand dollar (NZD). This was over one-quarter of their annual profit during the time. They had also sold more NZD than the size of the actual New Zealand money supply.
Another of Bill’s favorite stories came in 1987 where he positions himself both long and short using an options trading strategy known as a bull call spread.
“A bull call spread involves purchasing call options at a specific strike price while also selling the same number of calls of the same asset and expiration date but at a higher strike. A bull call spread is used when a moderate rise in the price of the underlying asset is expected.” – Investopedia
It has limited profit per contract, but if it went right, it would make a massive profit. Bill also knew one of the large market makers was on the other side of this trade. The price on Friday, near market close, was at a level that left both sides unsure if they should hedge or if the other side had. If either side figured out what the other had done, they would be the one profiting in the trade. Bill sums up the rest of the story this way:
“If he could figure out what I had done, there would be a potential play for him in the marketplace. As it turns out, I had not hedged, and I was net long the yen position. If he knew that, he could have gone into New Zealand, which is the first interbank market to open, and pushed the market against me. By telling him that they had tipped their hand by selling the yen on Friday afternoon, I let him believe that I had figured out their position-which I had-and hedged-which I had not. In any event, there was some news over the weekend, and the dollar opened up sharply lower against the yen. I actually ended up substantially increasing my profit on the trade.
[We profited] a totally ridiculous amount-something like $20 million. However, the thing that was so great about the trade was not the money but the mental chess game that Friday afternoon-all the back-and-forth bluffing. People were calling my desk all Friday afternoon to ask us what was going on between us and the other firm. There was nothing else going on in the market. These were the biggest positions in the market by a hundredfold that day.” – The New Market Wizards: Conversations with America’s Top Traders
In 1990 Bill left Salomon Brothers with his last position being the head of their Global FX Options Group and the NY FX Trading Desk. He is said to have made over $300 million per year while working for Salomon Brothers. He retired for a short time after leaving and then came back to the market in 1995 with own firm, Hathersage Capital Management.
Lipschutz has been featured in two print books about market traders;