Billionaire trader Chris Rokos has been among the major hedge fund managers who have profited during the crisis gripping UK financial markets, according to people familiar with his positioning.
Rokos, whose Rokos Capital Management is one of the world’s biggest macro hedge funds with $14.5bn in assets, has been running a bet that UK borrowing costs will have to rise, the people said.
The bet, which has not previously been reported, has paid off, both as surging inflation has forced up borrowing costs over the summer and then following a violent market reaction to Chancellor Kwasi Kwarteng’s “mini” Budget last month, whose unfunded tax cuts sent gilt yields surging.
The market turmoil, which was exacerbated by forced selling of gilts by pension funds, driving borrowing costs even higher, has delivered gains to a number of high-profile managers.
Rokos was a co-founder of and star trader at hedge fund firm Brevan Howard, where he made billions of dollars of profits for investors trading government bonds and options. A specialist in betting on the yield curve, he is one of the world’s most closely watched macro traders.
Another trader, Crispin Odey, has been shorting long-dated UK debt and sterling for some time, and told the Financial Times that such gilt positions were “the gifts that keep on giving”.
Rather than betting against UK government bonds, Rokos put on his position in the interest rate swap market, which is used by institutions such as banks and pension funds for hedging and commercial property firms for borrowing. The trade was placed some time ago, the people said.
UK interest rate swap rates have climbed sharply this year, even before the “mini” Budget. The five-year swap rose from 3.4 per cent at the start of last month to 4.1 per cent on the day prior to Kwarteng’s announcement, before surging to 5 per cent by the end of the month.
Rokos’s fund, which has already been making large profits from rising government bond yields this year, gained 11.5 per cent last month alone and is now up by more than 35 per cent this year, the people said.
Just prior to Kwarteng’s announcement, the fund was up 10.1 per cent for the month, said a person who had seen the numbers.
Rokos’s gains follows a difficult 2021 in which his fund lost around 26 per cent after being hit by a vicious sell-off in short-dated government debt.
Earlier this year the firm wrote to investors, in a letter seen by the Financial Times, that while shorter-term borrowing costs had already risen, longer term yields “may need to rise significantly from here”.
Rokos declined to comment.
In August the FT reported that big investors were betting on a fresh surge in UK borrowing costs, on fears that the energy crisis would drive inflation higher. This week the IMF warned that high inflation would last longer in Britain than in almost all other advanced economies.
Other funds have also been able to profit in the UK’s market turmoil.
Roy Niederhoffer’s New York-based RG Niederhoffer Capital Management, a computer-driven firm that made big gains in the 2008 financial crisis and which aims to profit from short term volatility, was able to buy into both gilts and sterling at low prices during the market panic.
Late last month its machine learning models, which are used across its funds, spotted an opportunity when sterling briefly plunged to a record low in Asian trading and bought in at $1.03. The pound has since recovered to around $1.12.
Niederhoffer’s main Diversified fund is up 78 per cent so far this year while its Smart Alpha fund has gained 28 per cent.