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UK elections aside, hedge funds bet pound to fall anew on Brexit
[LONDON] Whatever the outcome of Britain's election on Thursday, some hedge funds are still betting sterling will fall anew - anticipating Britain's exit from the European Union will lead to an economic slowdown whichever way the vote goes.
The pound has fallen 2.5 per cent in trade-weighted terms in less than four weeks as opinion polls showed the opposition Labour party gaining ground on the ruling Conservatives before polling day, raising the prospect of no party winning an overall parliamentary majority and some form of coalition government emerging.
US futures market positioning data shows investors have flipped back to betting more against the pound.
However, even if the Conservatives prove the polls wrong and secure an increased majority of parliamentary seats, many hedge funds expect any recovery in sterling to be short-lived.
"We think the pound will fall because we think investors have been taking the elections and the cost of Brexit too much under the radar -- they are under-estimating the risks," said Alberto Gallo, head of global macro at US$4.3 billion fund Algebris Investments.
He said he is positioned for the pound to fall due to long-standing problems in the British economy, regardless of Thursday's result.
"We think there is a strong chance that sterling would fall again because of consumer high debt levels in the UK and the distance between the UK negotiating positions and the European ones," he said.
Traditional views of whether Conservatives or Labour are good or bad for the pound have been muddied in this election, with some banks saying a high spending Labour government could be a boon for the economy.
But whatever the makeup of the future government, Britain's withdrawal from the European Union remains the biggest unknown.
Stephen Coltman, a senior investment manager at financial giant Aberdeen Asset Management, which invests directly in about 130 hedge funds, also said there is "definitely a bearish view among hedge fund managers on sterling".
"The majority view amongst the managers we speak to is that the pound is likely to depreciate versus both the euro and the US dollar over the medium term irrespective of the election result," said Mr Coltman.
"If the Tories win with a strong majority you could see sterling rally on the night, but I believe most managers would be inclined to sell in to that rally."
Richard Benson, co-head of portfolio management at specialist currency manager Millennium Global in London, said he assumed the market would quickly move back to Brexit issues once the election results were in.
"I assume that May will win and maybe slightly extend the current majority and then you will get a one per cent pop in sterling," he said.
"But then we move on to the next story - which is a hard Brexit."
The polls have painted a wildly varying picture of British public opinion going into Thursday's vote. Some say Mrs May is only 1-3 points ahead and will fall short of an overall majority. Others that she leads by 10 points or more, enough for a 100 seat landslide.
Bookmakers' odds stand somewhere in between but still bet overwhelmingly on the Conservatives forming the next government.
"A hung Parliament would be seen as a negative short-term for negotiations, resulting in lower Sterling, but we think it may actually turn into a softer stance versus Theresa May's antagonistic approach medium term," said Mr Gallo at Algebris Investments.
Philippe Ferreira, head of hedge funds research at Lyxor Asset Management, said human-led so-called 'macro' hedge funds that sit on his firm's platform are overall short sterling.
"A hung Parliament would likely translate into additional challenges in dealing with the EU; increasing the likelihood of a bad deal or no deal at all," said Mr Ferreira, whose firm invests US$16.4 billion in alternative investments, including hedge funds.
But there are those who believe the fall will be short-lived and offer an opportunity to pick up the currency cheaply.
"My assumption is still that we will get to a favourable outcome for the Conservatives and in a week's time we will get back to the path we were on before she called an election," said Stephen Jen, founder of London-based hedge fund Eurizon SLJ Capital.
"I know that sterling is under pressure. It may travel back to the mid US$1.20s before the election. That would be the low and an opportunity to buy."