Top investor buys ‘crash insurance’

Manager positions portfolios to cope with ‘exceedingly expensive’ markets, writes Laura Suter

One of Britain’s leading fund managers – who oversees billions of pounds of savers’ cash and has a personal fortune of £406m – is reported to be “stockpiling” insurance against a market collapse. Over recent months an investor of unknown identity has mystified traders by taking positions in complicated derivatives that make money when American shares become more volatile.

But the investor, who was dubbed “50 cent”, after the well-known rapper and musician (and because the contracts are priced at 50 cents each), has now been identified by the Financial Times as Jonathan Ruffer.

Mr Ruffer previously ran the popular Ruffer Investment Company, an investment vehicle popular with private investors whose shares are listed on the London Stock Exchange. He handed control to portfolio managers Steve Russell and Hamish Baillie in 2012.

However, he still oversees the Ruffer investment house, which manages billions of pounds in total, and is personally worth £406m, according to the most recent Sunday Times rich list.

He has previously warned that markets are expensive.

In a letter to investors last month entitled “Markets are high! (you heard it here last)”, he warned that “markets, especially in the US, are once again exceedingly expensive”.

He added: “There needs to be a reason for them to fall. If the markets discern a reason, they will fall sharply.”

The derivative trades he has bought – if indeed he has been correctly identified as the owner – will make money if the Vix index rises. The Vix is a measure of volatility of the S&P 500 index, the leading measure of American markets.

Commentators say he is likely to start profiting if the Vix index reaches 20. It is currently sitting at around 10.5 – similar levels to those seen in 2007 ahead of the credit crunch. During the financial crisis the index peaked at around 60.

Pravit Chintawongvanich, head of derivatives at Macro Risk Advisor, a broker, said this one investor’s position represented 8.5pc of such bets against the Vix index at the moment.

Separately, Mr Russell and Mr Baillie warned this week that attempts by governments to boost growth by “fiscal stimulus” – borrowing money for public spending on infrastructure, for example – would lead to higher inflation.

“We continue to believe that the next chapter of the post-crisis narrative will see greater involvement by government, with all the inflation risk inherent in a growing role for fiscal policy,” they said.

“In the meantime, inflation indicators in most jurisdictions are coming in higher than forecast. Inflation-linked bonds must sit at the core of our asset allocation for the foreseeable future.” The fund also has a holding in gold. The managers added that rising inflation was “sharpening policy dilemmas for central banks” over whether to raise interest rates.

They said the failure of President Donald Trump to make progress on his promises of tax cuts and greater spending on infrastructure meant that investors were beginning to question whether the “Trump bump” was sustainable.

“Fading hopes for imminent tax cuts, coupled with resounding silence on possible infrastructure spending, have prompted a rethink as to whether the arrival of President Trump genuinely represents a major change,” they said, adding that these developments spoke to “a risk of higher volatility in markets”. Renewable energy company Good Energy has launched a “mini-bond” that pays 4.75pc for investors who tie up their money for four years, with a higher 5pc rate for its customers.

The company, which is listed on the Aim junior stock market, supplies electricity in the UK from renewable energy sources. It aims to raise £10m from the bonds. Investors have until June 5 to apply and can invest in multiples of £250.

The bonds will offer a fixed rate of interest and must be held to maturity as, unlike the company’s shares, they will not be listed on any market.

Mini-bonds are risky: if the firm fails, investors are likely to lose all their capital and interest. They will have no recourse to the Financial Services Compensation Scheme, which protects deposits of up to £85,000. Several mini-bonds have failed already.

The term “mini-bond” is used to distinguish these unlisted bonds from “retail bonds”, which are traded on the stock exchange. Retail bonds are generally safer because the rules are much more stringent.

Good Energy launched its first mini-bond, paying 7.25pc interest, in 2013. It raised £15m. Investors in that bond can roll over their existing investment into the new bond.

www.telegraph.co.uk/funds