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Founder of $1 Billion Hedge Fund Bets Pound Has Potential to Rally More

Nishant Kumar

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A prominent money manager who oversees $1 billion in assets is betting on a stronger pound.

Ben Melkman, who quit Brevan Howard Investment to start Light Sky Macro LP, favors buying sterling via options on conviction that the currency has the potential to climb up to $1.35, a 5% advance from current levels.

While the U.K. currency surged the most since the financial crisis in October, analysts reckon it has the potential to strengthen more should next month’s election in Britain pave the way for the nation’s exit from the European Union.

Melkman’s strategy of betting via options offers a glimpse into how hedge funds are sidestepping the spot market for currencies in favor of more cost-effective methods. Using such derivatives to position for exchange-rate moves can cost much less than buying or selling currencies outright, since the option premiums are limited and losses are capped.

The pound was around $1.2850 on Thursday. It strengthened 5.3% against the dollar in October, the most for a month since May 2009.

In a presentation to clients, Melkman says that “...the latent uncertainty related to the election outcome provides an opportunity to position for the final leg higher” in the pound. Attempts to reach Melkman didn’t immediately yield a response.

Instead of buying a vanilla call option on the pound, Melkman suggests using a double knock-out structure since it would mean lower option premiums. The nature of the structure would mean that the options would expire worthless if sterling touches either of those strikes.

Melkman’s fund returned almost 16% this year, compared with 7.8% for its peer group.

--With assistance from Ven Ram.

To contact the reporter on this story: Nishant Kumar in London at nkumar173@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Anil Varma, William Shaw

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