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

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Sterling looks “vulnerable” to further falls and the looming recession could have “serious” effects on British society, according to the hedge fund firm of billionaire trader Chris Rokos.

Rokos Capital Management, which manages around $14.5bn in assets, told its investors that the UK had suffered a bigger shock to its terms of trade than other developed countries because of the impact of Brexit, deglobalisation and the coronavirus pandemic.

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

“The recession that is required to tame inflation in the UK is deeper than that needed elsewhere, with potentially serious societal implications,” it said. “Sterling looks vulnerable.”

Rokos declined to comment further.

The gloomy diagnosis comes after a number of high-profile fund managers targeted the UK market. Odey Asset Management founder Crispin Odey was among traders who profited from a plunge in sterling in September following former chancellor Kwasi Kwarteng’s “mini” Budget of unfunded tax cuts.

Rokos, one of the world’s biggest macro hedge funds, profited during the UK’s gilt market crisis in September, thanks to bets that UK borrowing costs would have to rise.

Sterling has fallen more than 10 per cent against the dollar this year and dropped to an all-time low of $1.035 in the wake of Kwarteng’s financial statement. Since then it has recovered strongly to around $1.21, its highest level since August.

Compounding the problem for Britain is the “disproportionately negative” hit that mortgage owners would take from higher interest rates, because fixed-rate home loans in the UK tend to expire more quickly than in other nations, such as the US. That, Rokos wrote, could mean that the Bank of England raises interest rates “too slowly to contain inflation”.

Rokos’s warning comes after highly bearish predictions from a number of other big-name managers. Paul Singer’s Elliott recently warned that the world was on the road to “hyperinflation” and could be heading towards its worst crisis since the second world war, while Saba Capital founder Boaz Weinstein has said global stocks could enter a Japan-style bear market lasting decades.

Rokos, a former co-founder of hedge fund firm Brevan Howard, has gained around 44 per cent in his fund so far this year. That puts him on track for his best year of performance since launch in 2015 and makes back large losses he suffered last year after being caught out by a sharp move in short-dated bonds.

His 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 globally, as central banks raise interest rates to try to combat high inflation.

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

It also warned that, with a recession a “necessity” in order to tame inflation and cash becoming a viable alternative investment to financial assets, global stock markets look “exposed” to further falls.

Given there were “essentially fewer resources available and more investment is required, prospective returns need to be higher”, it wrote. This means that “asset prices need to be lower”.

laurence.fletcher@ft.com

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