‘Short the pound’ was the hot play for UK hedge funds, with some closely connected to the government. Up next: Investigation?

‘Short the pound’ was the hot play for UK hedge funds, with some closely connected to the government. Up next: Investigation?

Hedge funds have reportedly made a fortune shorting the pound ahead of profligate tax cuts proposed by UK Prime Minister Liz Truss and her head of the Treasury, Chancellor Kwasi Kwarteng.

Just over 30 years after legendary investor George Soros became a billionaire by shorting the pound, hedge funds were at it again this weekend.

Soros was a relative rebel and outsider, though. What’s different this time is that U.K.-based hedge funds with close links to the U.K. government seem to have made out with massive paydays—and now may face investigation over whether they were leaked information the rest of the market never received.

In the week to September 20, investors had actually ramped up their bullish bets on the pound to their highest level since March, Bloomberg reported, citing data from no less an authority than the U.S. Commodity Futures Trading Association. 

Shorting the pound seemed quite obvious to many onlookers. No less an authority than Danny Blanchflower, a former policymaker for the Bank of England, posted on Twitter on September 20 that shorting the pound would only be sensible, given how strenuously he disagreed with Truss’ policies.

That may be due in part because the spending plan announced by Kwarteng on Friday amounted to a wholesale reversal of the previous budget under his predecessor, Rishi Sunak, a fellow Tory MP.

Short sellers help prevent bull markets from reaching euphoric valuations by identifying assets in danger of entering bubble territory or, in the recent case of truckmaker Nikola, revealing questionable if not downright fraudulent business practices. 

Yet the useful function they serve can be abused if they are privy to information that turns a risk-weighted bet into an all-in gamble that can destabilize markets if enough pile into the trade. 

And a pile-in it certainly was. And now Truss’ party is starting to get angry.

Labour opposition has called on the U.K. securities market regulator to probe whether the budget had been leaked to investors with privileged ties to the government.

“The Financial Conduct Authority should investigate any possible wrongdoing to determine whether it is possible that leaks or information provided by this Conservative government to its wealthy friends contributed to the pound’s collapse,” Labour’s Tulip Siddiq told the The Evening Standard. 

“If you thought the mini-budget was a maxi budget, I would say brace yourselves because you’re going to see a flurry of announcements on the supply side of the economy, deregulating enormously,” said Mark Littlewood, who acknowledged Truss was a frequent visitor to his think tank.

The budget has been slammed as “Kami-Kwasi economics” since the U.K. is dependent on attracting money from abroad to fund its import demand, so a weaker pound fuels inflation.

To stabilize its sagging currency, investment banks are now speculating whether the Bank of England will need to announce an emergency rate hike as the world’s fifth largest economy is quickly earning comparisons to more volatile emerging.

“Perhaps it was the unabashed revival of trickle-down economics that had markets a little aghast,” Deutsche Bank said.

UBS, meanwhile, warned the unfunded tax breaks will come out of added borrowing. As a result the total amount of UK government debt the private market will have to absorb over the next 18 months is almost the same as over the previous 54 months.

Last month, Saxo Bank analyst Christopher Dembik argued the UK is looking more like an emerging market than a wealthy, industrialized nation, citing political instability from the change in government, trade disruptions, an energy crisis and high inflation.

“The only major difference,” he wrote at the time, “there is no currency crisis.”