IT should have been a quiet afternoon. James Wood-Collins, still tanned and relaxed from a holiday in Santorini, brushed the crumbs from his baguette off his desk and refreshed his computer as he prepared for the American market to open.
The chaotic scenes from the Chinese stock market last Monday did little to rattle the 43-year-old chief executive of Record, a currency fund manager based in Windsor.
He figured the Chinese uproar was a storm in a tea cup. The New York market was not going to cut and run.
Not until a trader raised the alarm about a currency spike did he think something was amiss. Suddenly, it was no ordinary Monday.
“The Japanese yen spiked upwards by about 3% and the euro by 1.5%. It wasn’t a lot but it was very noticeable,” said Wood-Collins.
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Within hours, a key Record client withdrew $2.8bn (£1.8bn) from the company, which manages $56.6bn. Next morning the firm was forced to release a statement exposing the huge withdrawal. Investors ran scared, causing the company’s share price to drop almost 14% and bringing its market value down to about £70m.
“These movements caused many positions to be closed,” said Wood-Collins. He assured the market the fund as a whole could carry on as usual.
Record was one of many companies caught on the wrong side of China’s economic troubles last week. World equities lost $2.7 trillion in value last Monday on concerns that slowing exports and growth would hurt the global economy.
But there were others who called the market right. Savvy hedge funds had already bet against companies, countries and currencies exposed to China — and made a killing.
Despite a bounce in stock markets late last week, economists say China’s woes are far from over. Crumbling commodity prices and volatile currency markets will mean more losses for some. But for those who have sheltered their cash in so-called safe haven investments such as gold, or who “shorted” China — in effect, betting that prices would fall — the opportunities for profits are immense.
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Short-selling is a strategy used by hedge funds that borrow shares from pension and investment funds and sell them into the market.
When the agreed time comes to return them, the hedge funds buy them back for, they hope, less than their earlier sale price. The difference is profit.
Crispin Odey is one hedge fund tycoon who has used this strategy in the past month. His $3.2bn European fund surged by more than 10% in August after he began betting against luxury goods manufacturers, the Australian dollar and gaming companies. The thinking was that all of these were heavily exposed to China.
Odey, who took home £47.8m last year, told investors recently a devaluation by China would mean deflation breaking out across the world and forecast that the Chinese economy would falter. Growth would slow to 3%, which would create problems for countries “plugged into China’s growth”, especially Australia, South Africa and Brazil. He also predicted a fall in commodity prices.
Odey hasn’t always profited from such thinking. His European fund posted a record 19% loss in April. The firm complained in a letter to investors that it was “attacked on all sides” after making a premature bet on a Chinese economic slowdown.
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In Switzerland, Insch Capital, which bets on trends in the gold price, seems to have called it right. Its fund rose nearly 9% at its August peak when it bet against China-focused currencies.
“Investors need to start thinking about what’s going to protect them when the market turns,” said Christopher Cruden, chief executive at Insch Capital.
The fund relies on an algorithm that prompts it to move in step with the market. When prices are going up it increases its exposure and when they are going down it reduces its investment.
“People lose money for two reasons in this market — emotion and ego,” Cruden said. “By using an algorithm we cut out those two risks.”