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Greg Coffey, the Australian hedge fund star once nicknamed the “Wizard of Oz”, has emerged as one of the big winners in this month’s markets sell-off, according to three people familiar with the situation.
Kirkoswald Capital, the firm Coffey started in 2018 after coming out of retirement and which now manages about $8bn, has made hundreds of millions of dollars in the recent market turmoil, two of the people said.
The firm was positioned for a slowdown in the global economy and an increase in volatility, the people added. Kirkoswald declined to comment.
Tokyo’s Topix fell more than 12 per cent on Monday in the steepest sell-off since “Black Monday” in October 1987, before rebounding sharply on Tuesday.
The Vix index — the market’s “fear gauge” which shows how far investors expect US stocks to swing over the next month — on Monday surged to its highest level since the start of the coronavirus pandemic in early 2020.
The broad sell-off was sparked by a surprise decision by the Bank of Japan last week to increase interest rates, a shift away from expensive US technology stocks that dominate the market, and concerns that the US economy may be weakening faster than previously thought.
UK investment firm Ruffer, which manages more than $27bn of assets, was another investor to have profited from the turmoil, having long warned of an impending market slump. The Ruffer Investment Company — the firm’s investment trust — is up more than 4 per cent since the start of July, according to data provider FactSet.
Ruffer benefited from a long position in the yen, which has strengthened sharply against the dollar in recent weeks, and positions in a range of so-called safe-haven assets, such as gold.
At big multi-manager hedge funds, which employ dozens of teams trading different asset classes, portfolio managers hit up against limits designed to mitigate losses and were forced to close out positions.
As the Japanese currency strengthened and stocks sold off, other investors also had to unwind the popular “carry trade” where they borrowed money in yen and invested it in higher-yielding assets.
“For a while the idea developed that you could borrow money in yen, which cost almost nothing, and invest it in an asset of your choice, where the cost of borrowing was lower than the return you could get on those assets,” said Matthew Brett, an investment manager in the Japanese equities team at Edinburgh-based investment manager Baillie Gifford.
“Obviously those returns are not sustainable forever and as the currency strengthened, there was an uncomfortable feeling for anyone doing that trade,” he added.
Warren Buffett’s Berkshire Hathaway is one of the highest-profile foreign investors in Japanese companies. The conglomerate has repeatedly raised its stake in five of the country’s trading houses — Mitsubishi Corporation, Mitsui & co, Itochu, Marubeni and Sumitomo Corporation — which were caught up in the turmoil.
However Berkshire has held the investments over the long term and in Buffett’s annual shareholder letter this year he said that the unrealised gains from the holdings stood at about $8bn, before the latest turbulence hit.
Meanwhile Bridgewater Associates, the world’s largest hedge fund, had promoted Japan as one of the few markets that can diversify investors’ portfolios.
In a note earlier this year, the hedge fund’s co-chief investment officer Karen Karniol-Tambour said because “exposure to China is constrained for some investors, Japan represents the largest opportunity for diversification today”.
Additional reporting by Alan Livsey in London