Hedge fund managers including Crispin Odey are among those profiting from steep falls in sterling and UK government bonds as investors take flight on fears over the sustainability of the country’s public finances.
The founder of Odey Asset Management is one of a number of leading hedge fund managers who believe the pound could now fall to parity against the dollar or below. Both his group and other trend-following hedge funds have been running short positions — bets on falling prices — against the pound and longer-dated gilts for some time.
Odey’s bets — based on the belief that the market had badly underestimated how long inflation could stay high — are now paying off handsomely. His flagship European hedge fund is now up about 145 per cent this year.
“I don’t think you can start getting bullish on sterling,” Odey told the Financial Times, expressing his belief the pound could hit one-to-one against the dollar. “It’s so close” to parity, he said.
The adverse market reaction to chancellor Kwasi Kwarteng’s tax-cutting, high borrowing plan last week has hit both sterling and the gilts market, as investors fretted about its impact on inflation, government debt and Britain’s hefty current account deficit.
After the chancellor — who at one stage worked for Odey — suggested at the weekend there could be further tax cuts, sterling hit an all-time low of $1.035 on Monday.
“It’s been helpful,” Odey said about his short sterling position. “It [sterling and gilts] is all part of the same story of higher inflation . . . The market has been a long way from where inflation was.”
The pound is now down more than 4 per cent against the dollar since Kwarteng’s fiscal plan on Friday, while UK gilts are on course to post their worst month on records dating back to 1979.
Odey described his bets against gilts as “the gifts that keep on giving”.
Many of the bearish bets on sterling have also been run by so-called managed futures hedge funds, a sector running $390bn, according to data provider HFR. These strategies try to latch on to trends in global markets.
The pound’s fall from more than $1.40 in June last year has provided a strong trend for funds to follow. Funds have held a short sterling position for well over a year, according to Société Générale’s Trend Indicator, which models the positions of such funds, and in 2022 it has been the second most profitable bet for them, behind only wagers against Japan’s currency.
Rotterdam-based Transtrend, which manages $6.3bn in assets, is shorting sterling against a number of other currencies, and also betting against British fixed income instruments. Such bets together have been a big contributor to the fund’s gains of 7.4 per cent this month, while so far this year the fund is up about 30 per cent.
Many in the market are bracing themselves for further falls.
“Buying sterling here is like licking honey from the razor’s edge,” said Hugh Hendry, founder of Eclectica Asset Management, which wound down its hedge fund in 2017. “It would be remiss of the foreign exchange community not to allow for [sterling] to trade back at parity with the dollar and possibly trade below that level in the short term.”
Pilar Gomez-Bravo, director of fixed income Europe at MFS Investment Management, has been shorting the pound for some time and increased this bet to the maximum allowed in her portfolio following Kwarteng’s announcement last week.
She believes the pound could fall to parity with the dollar “and keep going unless there is a policy response” from the Bank of England or the government, although she added that she expected such a response to come.
Odey said he expected the pound to “bounce around now” and that both sterling and gilts were getting closer to the point at which being short was no longer attractive. He said his bet against the pound was not magnified by using debt and had been bigger in the past.
Odey said he did not have a trading advantage because Kwarteng previously worked as a consultant to Odey Asset Management.
“There’s a mad idea that one’s behind every twist and turn,” said Odey. “All I can do is catch the wind now and again.”