Hedge funds reap rewards after bets against bonds
A crop of hedge funds have been reaping bumper profits from a plummeting pound this week after wagering against government bonds and sterling ahead of Kwasi Kwarteng’s tax cutting ‘mini-budget’ on Friday.
The pound tumbled to its lowest level against the dollar ever yesterday as investor confidence in the UK evaporated on the back of the government’s plans to slash £45bn taxes and ramp up borrowing.
Some fund managers have been raking in profits after shorting government bonds and sterling however, with Brexit-backing fund manager Crispin Odey among the investors now betting that the pound will tumble to parity with the greenback.
“I don’t think you can start getting bullish on sterling,” Odey told the Financial Times in an interview, adding that “it’s so close” to parity.
Odey’s hedge fund is reportedly up around 145 per cent in 2022 after he shorted government bonds on the belief that inflation will remain rampant for some time to come.
Bets against sterling had been “helpful”, Odey told the FT, and the steep falls in gilts and sterling were “all part of the same story of higher inflation”.
“The market has been a long war from where inflation was,” he added.
Gilt yields hit multi-year highs yesterday as investors fretted that Kwarteng’s tax cutting plans threatened the UK finances, but have since eased this morning.
But some analysts have speculated that the shockwaves sent through the market could have permanently shifted the market perception of government bonds.
“Personally, I think this has fundamentally changed the valuation of gilts, with investors now demanding a higher risk premium,” Paul Jackson, Head of Asset Allocation Research at Invesco, told City PM
“This, along with general downgrading of views about UK policy-setting, has weakened the outlook for sterling (just as Brexit did).”