Hedge fund managers are making millions from the cheap pound

Hedge fund managers are among those profiting from sharp falls in the British pound and UK government bonds as investors flee on concerns about the sustainability of the country’s public finances. Many believe the pound may now fall to parity with the dollar or below.

Hedge funds have maintained short positions – bets on falling prices – against the pound for some time. Bets based on the belief that the market had grossly underestimated how long inflation could stay high are now paying off handsomely. One of those hedge funds is up about 145 percent this year.

The adverse market reaction to Chancellor Kwasi Kwarteng’s tax cut and high borrowing plan last week hit both the sterling and gilt markets as investors worried about its impact on inflation, government debt and the tough current British pound. Computerized traders also profited from strong selling of the UK’s foreign exchange account deficit

Sterling hit an all-time low of $1,035 on Monday after the chancellor suggested at the weekend that there could be further tax cuts.

Many of the bearish bets on sterling have also been driven by so-called managed futures hedge funds, a sector managing $390 billion. These strategies try to keep up with trends in global markets.

The pound’s fall from above $1.40 last June provided a strong trend to follow. The funds have held a short position in sterling for more than a year and in 2022 it is the second most profitable bet for them, after bets against the Japanese currency.

Many in the market are bracing for further declines.
The pound could fall to parity with the dollar and further down unless there is a policy response from the Bank of England or the government.