Traders can make big money with political insight
Political events can mean big money for hedge funds.
The Brexit vote in 2016 made many millions for funds who had shorted the pound.
Some of those funds had bought advance access to polling data, therefore had an information advantage over the public when it came to anticipating the result.
It has long been speculated that Nigel Farage, a commodities trader before becoming a Brexit-championing politician, helped them out by appearing to concede “remain” was likely to win as polls were closing, leading to a surge in the pound.
Funds who bought at that point banked a fat profit hours later when the actual results showed Brexit was winning, a fact that their polls had made clear to them.
There clearly are similar opportunities for hedge funds and other investors trading the SA markets.
But instead of advance poll data, the trick is to have advance insight into key political decisions.
During the Jacob Zuma years speculation was rife that information about the president’s decisions was circulated to key people before being made public.
Major market-moving events, such as the firing of Nhlanhla Nene as finance minister in late 2015, followed by the appointment of Pravin Gordhan days later, led to large moves in the currency.
So did the later recall of Gordhan from a road show to foreign investors when he was finance minister in March 2017.
The ANC’s elective conference in December last year was another major opportunity when the rand rallied on Cyril Ramaphosa’s election as party president.
From evidence emerging at the Zondo commission on state capture, it is quite clear that the Gupta family had advance notice of at least the firing of Nene and there is good reason to think its members had insight into just about every major decision Zuma made.
That information provided a large opportunity to profit.
We don’t know if the Guptas, or anyone else who might have had access to that information, actually made trades.
But there was opportunity, and given some of the other information about the Guptas’ money-grabbing proclivities, there was surely motive.
We know also that the Guptas had close business ties to some highly experienced financial market traders and we know that one of them, Eric Wood, of Trillian Capital Partners, did know of Nene’s impending fall.
The rand is one of the most traded emerging-market currencies in the world.
One can trade it from Dubai to Hong Kong, 24 hours a day.
There is no central record of all that trading, let alone one accessible to any one financial market regulator.
A survey of currency desks by the Bank of International Settlements in 2016 found that the rand was the 20th-most traded currency in the world.
At the time of the survey, $49bn worth of rand was traded per day, with the rand/US dollar pair accounting for $40bn of that.
Currency trading has another virtue in that one can take large positions with a relatively small amount of capital.
Currency brokers will allow even small-fry retail investors to put down as little as 2% to 3% of their exposure, effectively a deposit to cover any potential loss.
That means you don’t need that much capital to take sizeable positions.
If you want to short the rand, for instance, you borrow, say, R1bn, sell it in exchange for dollars, wait for the rand to depreciate, then buy back that R1bn.
That trade around the Nene firing, when the rand depreciated 7% in two days, would have made a profit of R68m.
And it would hardly show as a blip in the daily trading volumes.
Around the time of the Gordhan recall I flagged the sharp increase in trade in JSE-listed currency derivatives as indicating that someone had advance knowledge.
The Financial Services Board investigated and determined there was no case.
Currency trades are extremely difficult to monitor and it is not even clear whether there is a law against trading them on inside information.
The spot currency market is not a formal market in that there is no single exchange that posts bids and offers.
That feature would seem to exempt it from the normal rules on insider trading.
The exception is currency derivatives, which are listed on formal markets.
Trading those on inside information would clearly be illegal in most jurisdictions.
But a smart financial markets operator, given the information, could find a way to make untold profits that would be very difficult to detect and even more difficult to prosecute.
This, of course, applied during the Zuma years when political decisions moved the market. This year it has been dire economic data and international events that have tanked the rand.
Since the optimistic first quarter of 2018, the currency has crashed 27%.
Two quarters of local economic recession, and broader global concerns over emerging markets being driven by the implosion of Turkey and Argentina, have combined to inflict serious damage on the currency.
Smart political insight, rather than knowledge of specific political decisions, could identify value.
If Ramaphosa manages to push governance in a direction that will spark a stronger economy, the weakness is an opportunity.
Those indefatigable Ramaphosa optimists should position themselves for the upside.
● This article first appeared on BDLIVE.