U.K. Labour Consults $57 Billion Hedge Fund Shorting Pound
(Bloomberg) -- The U.K. Labour Party is consulting a hedge fund that is betting against Britain’s currency and says the economy may need an International Monetary Fund bailout.
BlueBay Asset Management LLP, which manages $57 billion of assets and is among investors that are speaking to the opposition party, is planning to meet its self-styled radical finance chief, John McDonnell, next week, according to people familiar with the matter.
“We’re not giving a political endorsement to a political party here, but as macro investors we actively engage in dialogue with policymakers across the spectrum,” said Mark Dowding, a senior portfolio manager at the firm. “There are elements of what Labour stands for that we find interesting and there may be elements that we disagree with.” He declined to comment on the meeting. Spokespeople for McDonnell also declined to comment.
Bridge building between the financial elite and a party led by long-time critics of business -- McDonnell calls himself a fan of Karl Marx -- reflects preparations by U.K. Plc for the demise of Theresa May’s Conservative government. She lost her majority in a stunning June election result that, combined with Cabinet infighting and fumbling over Brexit, have undermined her standing.
With gaining power now a realistic outcome for old-school Socialists like McDonnell and party leader Jeremy Corbyn, Labour is taking “advice and assistance” from asset managers to build an informal partnership with business leaders, McDonnell said in a BBC interview Wednesday. He said he didn’t want to “draw them into the politics” by naming them.
BlueBay, owned by Royal Bank of Canada, is based in London’s Mayfair district and has offices across Europe and the U.S. It manages money for institutional investors and invests mainly in fixed-income securities. Its funds are shorting the pound and U.K. government bonds, meaning they will gain from a selloff, according to BlueBay’s Dowding.
The U.K. economy is so weak it may require a bailout from the IMF, as in 1976, Dowding warned in July.
Even McDonnell, who would be finance minister in a Labour government, has had his doubts. While a run on the pound is unlikely if Labour takes power, “you never know,” he said in September. Labour is “going to be a radical government,” he said. The party has pledged to take into state ownership the railways, water companies and Royal Mail Plc, as well as some energy companies.
“John McDonnell has made clear, as Labour prepare for Government, the Shadow Treasury team is happy to meet investors that have requested to meet with Labour,” the Party said in a statement. “We are completely open with them about our economic policy.”
The pound declined about 17 percent against the dollar from the June 2016 vote to pull Britain out of the European Union until the start of 2017. It has recovered about half those losses this year. The currency is trading at about $1.33 now; at its 2017 low, it slipped under $1.20.
BlueBay, which requested next week’s meeting, first started talking to Labour officials late in 2016, according to one of the people. At that time the firm’s predictions defied political consensus, with Dowding writing in a company blog post that an election was possible in 2017 “which we believe would lead to Jeremy Corbyn in 10 Downing Street.” BlueBay then requested a meeting with McDonnell soon after the June 2017 election, the person said.
BlueBay’s Labour point man is portfolio manager Mark Bathgate, 43. He joined the firm in 2016 following stints at banks including UBS Group AG and Goldman Sachs Group Inc, according to his LinkedIn profile.
Bathgate, whose job at BlueBay includes meeting politicians and regulators, correctly predicted the surprise outcome of the U.K. general election on June 8, according to a report published by the Legatum Institute think tank last month. He’s in favor of some of Labour’s policies, including some nationalization, he said.
“Other developed countries show that nationalized rail can work if managed well,” he said by phone, adding that greater state involvement in utilities might be justified by their “massive capital expenditure need” in future.
“It’s not a surprise there is a swing toward redistributionist policy” because living standards in the U.K. have fallen, Bathgate said. “Whether it’s good or bad is not for us to decide. We’re making sure we engage with a prospective government.”
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