Hedge Funds Exploiting Scotland Vote Uncertainty

Updated on

A September 11th article in the Wall Street Journal suggests that the referendum on Scotland’s exit from the UK is creating profitable trading opportunities for a number of London hedge funds. Given the outcome of next week’s Scotland vote is a high-profile concern for most European fund managers, funds are establishing new positions ranging from bets against the Sterling currency or Scotland-related stocks, to buying index put options as insurance against an equity market slump.

Currency traders especially active

Currency traders, who have been starved of good trading ideas (aside from shorting the ruble) in calm markets of late, have been especially active over the last couple of weeks.

“Over the course of the last week it (the referendum) has become item number one, for sure,” noted James Ind, fund manager at GLG, a unit of Man Group PLC (OTCMKTS:MNGPF). “The currency market is the cleanest way to play this.”

Ind said making a trade from the options market would offer better odds and a larger payout than a bookmaker if the Scotland vote ends up for independence. He speculated that most funds could also bet on the pound to fall against the euro in that event.

Statement from hedge funds exec

After Sterling climbed over 16% against the dollar July, the pound dropped to a 10-month low earlier this week when a new poll showed pro-independence for Scotland voters leading for the first time.

“It is almost the sole thing driving the pound at the moment,” explained Paul Chappell, chief investment officer at hedge fund company C-View. “The tactics from the Let’s Stay (campaign) have been poor in the extreme and have created uncertainty.”

Chappell also allowed he bet on the pound to drop last month and also stocked up on currency options, saying the options market had been “extremely disinterested until three weeks ago” in the referendum.

However, Chappell, who anticipates a No vote on the referendum, has since reduced his positions after the recent rout of the pound, saying that the currency swings are “casino-like.” He did note he is positioned to make profits from continued volatility.

Leave a Comment