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Crispin Odey and other hedge fund managers are benefiting from the sterling crash

Crispin Odey and other hedge fund managers are benefiting from the sterling crash
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Hedge fund managers like Crispin Odey are among those benefiting from the sharp fall in sterling and UK government bonds as investors flee concerns about the sustainability of the country’s public finances.

The founder of Odey Asset Management is one of several leading hedge fund managers who believe the pound could now fall to par or below against the dollar. Both his group and other trend-following hedge funds have had 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 grossly underestimated how long inflation could stay high – are now paying off nicely. Its flagship European hedge fund is now up about 145 percent this year.

“I don’t think you can go bullish on sterling,” Odey told the Financial Times, expressing his belief that the pound could go up one-for-one against the dollar. “It’s so close” to parity, he said.

The negative market reaction to Chancellor Kwasi Kwarteng’s borrowing-heavy tax cut plan last week has hit both sterling and the gilt market as investors worried about the impact on inflation, sovereign debt and the UK’s huge current account deficit.

Sterling hit an all-time low of $1.035 on Monday after the Chancellor – who worked for Odey at times – hinted at more tax cuts over the weekend.

“It was helpful,” Odey said of his short sterling position. “It [sterling and gilts] is all part of the same story of higher inflation. . . The market is far from inflation.”

Line chart of $ per £ showing sterling against the dollar

The pound is down more than 4 percent against the dollar since Kwarteng’s budget on Friday, while UK gilts are on track for their worst month since 1979.

Odey described his bets against gilts as “the gifts that keep giving”.

Many of the bearish bets on sterling were also made by managed futures hedge funds, a $390 billion sector, according to data provider HFR. These strategies attempt to tie into trends in the global markets.

The pound’s fall from more than $1.40 in June last year has given the funds a strong trend to follow. Funds have held a short sterling position for well over a year, according to Société Générale’s trend indicator, which models such funds’ positions, and in 2022 this was the second most profitable bet for them, behind only bets against the Japanese currency.

Rotterdam-based Transtrend, which has $6.3 billion in assets under management, is shorting sterling against a range of other currencies and also betting against UK fixed income instruments. Such bets combined have made a large contribution to the fund’s gains of 7.4 percent this month, while the fund is up about 30 percent so far this year.

Many in the market are gearing up for more falls.

“Buying sterling here is like licking honey off a razor blade,” said Hugh Hendry, founder of Eclectica Asset Management, which wound up its hedge fund in 2017. “It would be remiss of the forex community not to take this into account [sterling] to trade back at par with the dollar and potentially trade below that level in the short term.”

Pilar Gomez-Bravo, Director of Fixed Income Europe at MFS Investment Management, has been short the pound for some time, increasing that bet to the maximum allowed in her portfolio following Kwarteng’s announcement last week.

She believes the pound could fall to par with the dollar “and continue unless there is a policy reaction” from the Bank of England or the government, although she added she expects such a reaction.

Odey said he expects the pound to “jump around now” and that both sterling and gilts are approaching the point where being short is no longer attractive. He said his bet against the pound had not been magnified through the use of debt and had been larger in the past.

Odey said he doesn’t have a trading edge because Kwarteng previously worked as a consultant for Odey Asset Management.

“There’s a crazy idea that you’re behind every twist and turn,” Odey said. “I can only catch the wind every now and then.”

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