Hedge funds play cool on big Brexit bets

The British Union Jack flag (R) flies amongst European Union member countries' national flags in front of the European Parliament on June 9, 2016 in Strasbourg, eastern France. On June 23, 2016 Great Britain will hold a referendum on whether or not the United Kingdom will remain within the European Union, often referred to as "Brexit". / AFP PHOTO / FREDERICK FLORINFREDERICK FLORIN/AFP/Getty Images©AFP

Hedge funds are shying away from big bets on Brexit, with many unwilling to risk further losses having already suffered a painful first half of the year.

With the outcome of a UK vote on the country’s membership of the European Union still looking uncertain, many large hedge funds have opted to reduce their overall market exposure rather than attempt to predict a result.

Stan Miranda, chief executive of London-based Partners Capital, said his fund had put on smaller trades in anticipation: they expect sterling to fall as much as 15 per cent if the UK exits, or bounce a few percentage points if it does not. It has used futures and options on gold and currencies, he said.

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“The most obvious [play] is the currency. We’re shorting the euro against the dollar because of the contagion issue,” he said. “We’re not ignoring it [Brexit], we’re just expecting to lose money on these bets.”

One hedge fund manager controlling a multibillion-dollar fund said that traders were finding it hard to find a clear edge in markets.

“There is a lot of defensive positioning,” he said. “Most people have no real risk on at all, and there is an ongoing liquidation of positions. Most people think [Brexit] it is too close to call. It would be crazy to make any large bets on it due to the poor start to the year.”

Anthony Lawler, head of portfolio management for GAM Alternative Investments Solutions, echoed that sentiment, saying “managers have in the main reduced exposure”.

Following one of the most painful periods for the hedge fund industry since the financial crisis, few funds have been willing to take on additional risks linked to the Brexit referendum.

The HFRI Asset Weighted Composite index, which tracks the performance of the industry, dropped 1.8 per cent in January and another 0.9 per cent in February before climbing back about 0.5 per cent per month since — leaving it down 1.3 per cent this year to date.

To many, the trades considered — shorting shares of companies closely tied to consumers, betting on a slowdown or shorting the bonds of peripheral EU countries — did not offer enough reward for the risk.

Some managers have been intentionally waiting to take advantage of market dislocations following the result, expecting sharp price movements whatever the outcome.

One manager of a multibillion-dollar fund said he was eagerly awaiting what he expected to be highly volatile markets following the result.

Another manager, at a macro fund in London, said it was not trading in sterling or any UK stocks ahead of the vote but was planning to trade around volatility.

He said there would be “a lot of opportunities trading into the event, if you focus on assets other than sterling”. The manager said he was buying puts and calls, and looking for opportunities among assets that have sold off, such as banks in Europe.

“There’s less risk capital being deployed,” but people are positioning in case of an exit, he said. “Which way the vote goes determines how we are positioned for the rest of the year.”

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