The pound’s peak on October 20 following the exit of British Prime Minister Liz Truss proved to be a dead cat bounce, with the currency falling below pre-resignation levels the following day.
With volatility continuing around the pound, hedge funds are considering a cautious approach.
Truss announced her resignation on October 20, becoming Britain’s shortest prime minister with just 44 days in officefollowing a disastrous mini-budget which pushed the pound to its lowest level since 1985 against the US dollar.
The pound has lost almost 20% of its value against the US dollar since the start of 2022. Most hedge funds were bullish on the pound ahead of the September mini-budget, according to data from Chicago-based exchange CME and London-based research firm Macro Hive.
However, negative sentiment surrounding the pound and the UK market and economy in general hastened Truss’ demise following the mini-budget fiasco.
The plunge rewarded hedge funds that shorted the currency. Based in London Odey Asset ManagementOverall performance in 2022 is up 193% compared to the same period last year, according to Bloomberg.
Based in Switzerland EDL Capital which manages about $857 million according to an investor document cited by Bloombergwould have increased by 11% until August.
Patrick Ghali, co-founder of hedge fund consultancy Sussex Partners, said Financial news that the rise in sterling short bets reflects the UK’s negative macro outlook and expectations of greater ‘political volatility’.
“Many funds will be very careful about their positions in such an environment, as unpredictable reversals are a real risk,” Ghali said. “I would expect gilts and sterling to remain volatile until things become clearer.”
Although initial market reaction following Truss’s resignation was positive, uncertainty regarding future leadership and fiscal policy could push markets lower.
“We would be cautious in extrapolating the strength of GBP as a leadership election could further divide conservatives,” said Bilal Hafeez, CEO and head of research at Macro Hive. FN.
In the third quarter of Third Point letter to clients published on October 18, hedge fund billionaire Dan Loeb also raised concerns about the UK tax fiasco. According to Loeb, several financial experts see an “extended bear market”.
Against a backdrop of rising inflation, falling sterling and uncertain economic policies, the UK economy is expected to have the slowest growing among G7 countries next year, according to an estimate by the International Monetary Fund.
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