Computer-driven funds likely winners from sterling flash crash

A money changer advertises rates on a board in London on Oct 7, 2016.
A money changer advertises rates on a board in London on Oct 7, 2016.PHOTO: REUTERS

LONDON (REUTERS) - Computer-driven hedge funds were most likely the main winners when the British pound lost a tenth of its value to a 31-year low in a matter of minutes on Friday, investors said.

There were some losers too but many of these hedge funds have been running significant bets against the pound since earlier this year, ahead of the June 23 referendum on European Union membership.

The US$200 million (S$275 million) computer-driven hedge fund Piquant Technologies made between 10 and 15 basis points of profit - or roughly US$200,000 and US$300,000 - from a short position made before the flash crash.


"Today, we are making some money on our short positions on the pound," said James Holloway, partner and chief investment officer at Piquant Technologies.

Piquant's artificial intelligence systems, which follow market patterns, bet against the pound about two weeks ago and have been building that position strongly.

The pound has been under pressure for most of this week as anxiety grows that Britain will opt for a "hard" exit from the European Union.

But on Friday, it dived about 10 per cent from levels around US$1.2600 to US$1.1378 in a matter of minutes in thin early Asian trade. That low was later revised to US$1.1491 - still the weakest level for sterling since 1985.

"All of the trend followers (computer driven hedge funds) will benefit," said a fund of a hedge fund investor. "Some will have makes them a P&L of 25 basis points (bps) to 125 bps just on their sterling exposure."

Data from the US Commodity Futures Trading Commission shows speculators which consists of these futures traders and hedge funds, some of which follow broad macro economic trends, had nets bets of 87,714 futures contracts against the British pound in the week to Sept 27, up from 58,686 contracts a week earlier.

Data for the week to Friday will not be available for another week. But Nicolas Rousselet, head of hedge funds at Unigestion, said its survey also backed the idea that CTAs or computer-driven funds would have made the biggest gains.

"While conducting our monthly survey across global macro managers, we can see that they were globally bearish sterling but had little size onto the trade. Trend following CTAs are however clearly short sterling," said Nicholas Rousselet, head of hedge funds at Unigestion.

The pound was last trading 1.5 per cent lower at US$1.2420 with many investors of the view that May's government is leaning towards a hard Brexit, where Britain gives up full access to the single market in order to impose full control on its borders.

Some analysts fear that this could hinder trade and constrict the foreign investment needed to fund Britain's current account deficit, one of the biggest in the developed world.

Traders said once sterling fell below the psychological US$1.25 mark and weakened past various technical support levels on the move lower in Asian trade, it spooked traders, including the computer-driven algorithmic traders.

While some algo traders who bet against the pound had made money, a few had backed sterling and lost out.

"We were long the British pound going into it but obviously it hurt our profit and loss (account) during the day. It does hurt our long position in sterling but only by a few basis points," said Alastair Smith, partner at Harmonic Capital Partners.