Hedge fund Rokos warns sterling is 'vulnerable' to further falls

Hedge fund Rokos warns sterling is ‘vulnerable’ to further falls

The pound looks ‘vulnerable’ to further falls and the looming recession could have ‘serious’ effects on British society, according to billionaire trader Chris Rokos’ hedge fund firm.

Rokos Capital Management, which manages around $14.5 billion in assets, told its investors that the UK has suffered a bigger shock to its terms of trade than other developed countries due to the impact of Brexit, de-globalization and the coronavirus pandemic.

Such deterioration, which puts pressure on an already gaping current account deficit and can stoke inflation, has made it harder for policymakers to control consumer price growth, the firm wrote in a letter seen by the Financial Times.

“The recession needed to get inflation under control in the UK is deeper than that needed elsewhere, with potentially serious societal implications,” he said. “Sterling looks vulnerable.”

Rokos declined to comment further.

The grim diagnosis comes after a number of top fund managers targeted the UK market. Odey Asset Management founder Crispin Odey was among traders who took advantage of the pound’s plunge in September following former Chancellor Kwasi Kwarteng’s ‘mini’ budget of unfunded tax cuts.

Rokos, one of the world’s largest macro hedge funds, took advantage of the UK gilt market crisis in September on bets that UK borrowing costs were set to rise.

The pound has fallen more than 10% against the dollar this year and fell to an all-time low of $1.035 following Kwarteng’s financial statements. Since then, it has rallied sharply to around $1.21, its highest level since August.

Compounding the problem for Britain is the ‘disproportionately negative’ hit mortgage owners would suffer from higher interest rates, as fixed rate mortgages in the UK tend to expire faster than in other countries, such as the United States. That, Rokos wrote, could mean the Bank of England is raising interest rates “too slowly to contain inflation.”

Rokos’ warning comes after very bearish predictions from a number of other high-profile managers. Paul Singer’s Elliott recently warned that the world was on the road to “hyperinflation” and could be heading for its worst crisis since World War II, while Saba Capital founder Boaz Weinstein said stocks global markets could enter a Japanese-style bear market for decades. .

Rokos, a former co-founder of hedge fund firm Brevan Howard, has gained about 44% in his fund so far this year. This puts it on track for its best year of performance since its launch in 2015 and recoups the significant losses it suffered last year after being surprised by a strong move in short-term bonds.

Its gains this year come during a fruitful period for macro-hedge funds, many of which have been able to profit from a huge rise in government bond yields around the world, as central banks raise interest rates. interest in trying to combat high inflation.

Rokos said to be more optimistic about the UK’s outlook he would have to see “signs of a softer, quietly engineered Brexit”, or higher immigration.

He also warned that with a recession a “necessity” to keep inflation under control and cash becoming a viable alternative investment to financial assets, global stock markets appeared “exposed” to further falls.

Since there were “essentially fewer resources available and more investment is needed, the potential returns must be higher,” he writes. This means that “asset prices must be lower”.

laurence.fletcher@ft.com

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