On the 22nd of September, £1 was worth around £1.13. A week later it was worth only $1.07, having slumped to a record low of $1.03 during the week. Some blamed the depreciation on hedge funds. The Daily Mail’s front page on 27th September screamed “FURY AT THE CITY SLICKERS BETTING AGAINST UK PLC”, quoting senior Tories angry at “speculators” for shorting the pound. Labour have called for a “probe” into whether the mini-budget was leader to traders in advance of being announced, gifting them time to position their portfolios to benefit from a fall in UK asset prices.
The data don’t support these claims, however. Hedge funds’ short positions in GBP/USD futures contracts barely changed after Truss became PM:
Selling these contracts would probably be the easiest way for a hedge fund to short sterling, though there are other strategies they could employ. For example, they could instead borrow sterling cash, use that cash to buy USD, and then repay the sterling loan after the value of the currency has fallen in value. But that trade would be hard to “leverage” as the loan would have to be fully secured by collateral such as gilts. The hedge funds’ potential profits would therefore be limited. Futures, meanwhile, often only require a small downpayment (say 10% of the contract’s value). And so the hedge fund could effectively multiply the upside of the trade tenfold.
And hedge funds actually have more long-sterling futures contracts than they do short-sterling futures contracts. The net value of these, calculated by subtracting the value of the shorts from the longs, is therefore positive. They are positioned to gain from an appreciation in sterling:
Asset managers, meanwhile, are net-short sterling. Though, that’s probably because they invest in sterling-assets and want to hedge against further appreciation in USD, rather than because they’re gambling on the direction of UK fiscal policy:
