Hedge funds place big bets on sterling rising after election

Hedge funds are placing big bets on the pound rising after the British general election - going against the prevailing view, expressed by Goldman Sachs and other banks, that UK assets would suffer in the event of a hung parliament.

Several hedge funds managing billions of dollars of assets have made trades in recent weeks based on the assumption that the pound will not react as strongly as expected to any likely election result and that shares in UK companies have already been oversold by investors.

The trades contradict a growing consensus in financial markets that the most plausible outcomes for the general election will be bad for the value of the pound.

"The consensus view is that the election will be a lose-lose situation for sterling assets," said one London-based macro hedge fund manager.

"People think an SNP-Labour coalition will be bad for business, and that a Tory win could trigger a referendum on leaving Europe, which would damage the pound. I think that view is wrong. This provides us with a trading bias, and that is to being long sterling".

Another London-based hedge fund manager who focuses on stocks said he had been adding to his exposure in part state-owned Lloyds Banking Group, which some traders say has been left undervalued because of concerns that a Labour government could introduce caps on retail banks' market shares.

On Tuesday Goldman Sachs warned that a Labour-led government was likely to spark a sell-off by investors and said: "Sterling is the asset that appears most at risk from a 'market-unfriendly' election outcome."

Other banks have issued investor notes warning that a Labour victory could unsettle markets, and noted a surge in demand for insurance against sharp swings in the value of the pound.

Financial markets have increasingly priced in a sharp movement in the pound in the run-up to the election, with one month implied volatility for the pound against the dollar hitting its highest level since 2011, and the same measure against the euro also rising.

While many investors have avoided taking on large amounts of exposure to UK-linked assets ahead of the vote, others believe that this recent lack of participation has meant some UK markets have lagged behind the rally seen in continental Europe, and may be poised to catch up.

"As uncertainty about the election has increased, there has been a lot of buying of sterling volatility with people pricing in that there will be a big move one way or another," said Luke Ellis, president at Man Group, the world's largest listed hedge fund manager.

"Often when there is significant buying of volatility around an event, the actual move in the end is not so large. This may have gone too far, and some investors might be more interested in taking the other side of that trade at these prices".

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