Here’s How Hedge Funds Are Playing the Pound

(Bloomberg) -- While strategists argue U.K. Prime Minister Theresa May's Brexit bill defeat sets up some bullish scenarios for the pound, few hedge funds remain willing to go all in.

AMP Capital Investors Ltd. bought sterling through its dynamic markets fund on Tuesday as Sydney-based portfolio manager Nader Naeimi wagered on a temporary relief rally in the beaten down currency. But Naeimi, whose firm oversees the equivalent of $135 billion, has since taken profit on the trade.

“It was a short-term play on the odds as markets were so pricing in a heavy defeat,” the fund manager said by telephone. “We've since closed off that position. It was a very short-term trade.”

Sterling slumped as much as 1.5 percent Tuesday before erasing losses as the British parliament's rejection of Prime Minister May's Brexit proposal roiled financial markets. The pound then dropped as much as 0.3 percent in early Asian trading Wednesday before again retracing. Cable has the highest one-month implied volatility among the Group-of-Ten currencies on Wednesday.

Though the likelihood of pound positive scenarios such as a delay in Article 50 or a second referendum have increased, uncertainty over how May will pull together a new deal has spurred risk aversion. The prime minister is expected to survive a vote of no confidence called by the opposition party later Wednesday.

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“The market may still be a bit optimistic at this point,” said Damien Loh, chief investment officer of Ensemble Capital in Singapore. “My thinking is that Theresa May's deal does go through in some shape or form.”

While the artificial intelligence-driven fund is not actively trading the pound right now, Loh sees potential opportunities to play the currency through derivatives including call spreads.

“Sterling still looks very cheap on a medium term or valuations basis -- I think options is still the way to trade it,” he said.

Happy To Wait

Still, others aren't willing to bet on U.K. assets just yet.

Nick Griffin, chief investment officer of Munro Partners, has hedged all of the sterling exposure in his global equities portfolio back to Australian dollars -- and he's happy to stay on the sidelines before adding to more of his U.K. stock holdings.

“We're not in a hurry to buy because things are cheap,” Melbourne-based Griffin said. “We're happy to miss that first 10 percent as we wait for the outcome to evolve as there are still some fairly adverse potential outcomes here.”

--With assistance from Matthew Burgess.

To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Cormac Mullen, Nicholas Reynolds

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