Hedge Funds Are Betting U.K.’s Most Battered Assets Will Rebound
Several hedge funds are of the mind to buy the beaten-up pound and gilts. Others say investors should remain cautious.
(Bloomberg) --
A number of hedge funds are starting to come around to the idea that it may be time to buy the beaten-up pound and gilts. Others say investors should remain cautious.
Great Hill Capital in New York sees opportunities to go long sterling after the currency’s recent wild ride. Blue Edge Advisors Pte sees positives in longer-maturity gilts as global growth slows.
“I would buy it here and suck up any short-term volatility,” said Thomas Hayes, chairman and managing member at Great Hill. “I cannot tell you what will happen to the pound in the next days, weeks or months, but over the next one-to-three years the pound will be meaningfully higher against the dollar.”
UK assets have been whipsawed over the past month as the government first introduced a raft of tax cuts in a mini-budget, and then retracted almost all of them as the pound and gilts plummeted on fears of a fiscal shortfall. The currency slid to an all-time low of $1.0350 on Sept. 26 only to rebound about 10%, while 10-year gilt yields have swung between 1.71% and 4.64% over the past three months.
Sterling’s outlook is starting to look a little calmer, with one-month implied volatility dropping to 17% from a more-than two-year high of 24% on the day the currency nosedived. Still, there are plenty of uncertainties ahead.
‘Irrationally Negative’
Vulpes Investment Management’s Stephen Diggle in Singapore said last month one of his funds bought the pound when it slid to a record low. While the fund took took some profit at $1.14, he remains long on sterling.
“At some level I think it is still about Brexit,” Diggle said about the pound’s decline. “The speed with which critics of the mini-budget, like Larry Summers, started talking about Brexit is very revealing,” and contributed to people becoming ‘irrationally negative’ about anything the current government does,” he said.
‘Creating Chaos’
K2 Asset Management in Melbourne prefers to stay underweight on UK macro assets due to the extraordinary volatility.
“Trading UK assets hasn’t been this chaotic in some aspects since Soros,” said George Boubouras, head of research at the hedge fund, referring to banker George Soros’ bet against the pound in 1992. “Hedge funds will still be creating chaos especially in the gilts market. It remains a big short target among bond vigilantes.”
‘Active Volcano’
Blue Edge remains wary on the pound but also sees some positives, being “constructive” on longer-maturity gilts as the Bank of England seeks to calm markets.
“I would think given the volatility and reactions we’ve seen from both the government and BOE, there’s at least a tacit recognition of the conflicting agendas between administration and central bank and they’re working to resolve that,” said Calvin Yeoh, a money manager at the fund in Singapore. “This should give investors some confidence but policy volatility remains.”
Still, “trading the UK market right now is like playing musical chairs at the foot of an active volcano,” he said.
(Updates to add fund manager comment in sixth and seventh paragraphs.)
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