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 Asset managers and hedge fund desks at major banks contacted by
Reuters said "tail risk" funds which bet on major financial events
such as the euro zone's debt crisis or the global credit crash think
the risk of a pound meltdown is just too small.
And many of the shorter-term day-to-day speculators appear to have
missed the bulk of this year's 9 percent drop and do not see a 'big
short' on the pound as worth the risk, they said.
"It's not a high-quality exposure to have on," said GAM portfolio
manager Anthony Lawler in London, who invests about $25 billion in
hedge funds. "People don't think Brexit will happen, first of all,
and now the price of sterling has fallen and the price of an implied
volatility option is high."
Most bookmakers - watched more closely than opinion polls in
financial markets after calling a series of major political events
in the past decade more accurately - show only a 1 in 3 chance of a
British vote to leave the EU on June 23.
But even if that does happen, hedge fund managers say the
uncertainty over the aftermath is too high to make a large "short"
sterling position - a bet that the currency will fall - in the
run-up or immediately after the vote an attractive play.
Some even reckon the euro currency may fare worse over the long term
if Britons vote to leave the wider 28-nation EU bloc.
"The big funds have been fairly uninvolved in the Brexit trade,"
said the European head of hedge fund sales at one of the top 10
currency trading bank.
"There has been interest, but most have not participated in the
(sterling) move from $1.50 to $1.40," he added. "It already looks
too pricey for them to make the jump."
The pound <=GBP> has just put in its worst three-month performance
since the depths of the financial crisis seven years ago, losing
almost 9 percent against a basket of currencies since the start of
December on Brexit worries and as investors pushed back their bets
on a rise in interest rates.
Against the dollar, sterling hit seven-year lows this week, within 3
cents of lows last seen when it was en route to a 1-for-1 exchange
rate (parity) with the dollar in the mid-1980s <GBP=D4>.
Speculators reduced net bets for a weaker British pound to their
lowest in six weeks in the week up to last Tuesday, during which
time the pound tumbled over 2.5 percent, data on Friday showed,
suggesting hedge funds played no major part in that fall.
Most macro hedge fund managers, who can take long or short positions
on a range of assets based on macroeconomics, do not think the
risk/reward ratio of shorting sterling is skewed in their favor.
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COSTLY TO HEDGE
The currency market's number four bank, UBS, this week predicted
sterling might fall to parity with the euro in the aftermath of an
"Out" vote. Several other banks - including Citi, HSBC and Goldman
Sachs - have all said the pound could lose up to 20 percent of its
value on a Brexit.
However, investors say currency options - derivatives which provide
for payouts under a variety of future conditions - which are the
natural place to bet cheaply on big falls in sterling, have become
too expensive.
The difficulty is that overseas companies and big institutional
investors with UK share portfolios are buying the same options to
protect themselves against a sterling collapse.
That has driven the price of options that allow investors to hedge
against further big falls in sterling against the dollar over the
next six months to a 4-1/2-year high of over 13 percent.
"The risk premium priced across the curve is quite significant and
that has left lots of people thinking it is too expensive," said the
head of FX sales with one of London's top six banks. "The majority
of the flow (has been) dominated by slower moving accounts like real
money and corporates."
Equity portfolio managers who already have exposure to sterling
through their stock holdings are being forced to take a view which
is, largely, that sterling is likely to be weak in the run-up to the
referendum.
London-based Liontrust Macro Fund manager Stephen Bailey, who
invests in equities from a fundamental view point, has increased the
proportion of U.S. stocks that he invests in to the maximum 20
percent that the fund allows, effectively backing the dollar against
the pound.
Others think a short euro position is more attractive, arguing that
Britain's debate could encourage eurosceptic parties in other EU
states, including those using the euro.
"If the market takes a risk-negative view on Europe based on the
political dynamic it will suit our portfolio," said Omni Macro Fund
portfolio manager Christopher Morrison.
"In this instance, we are not short the euro but following the
political developments in the euro is of more interest than Brexit."
(Additional reporting by Maiya Keidan; editing by Anna Willard)
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