Hedge Funds' Brexit Pain?
Hedge fund managers won't admit it, but they live for the quarter. While some of the bigger firms update clients more often, regular outfits provide an update four times a year, after which investors often decide to redeem their holdings or leave things as is.
So it couldn't be more unfortunate that Brexit happened just five trading days before the end of the second quarter. Even the savviest of money managers would struggle to recoup the kind of losses seen over the past two sessions. And a smaller gain, or a negative return, could spur outflows from an industry already under fire.
Hedge funds globally saw a net $15 billion exit from January to March, reducing assets under management to $2.86 trillion from $2.9 trillion, Chicago-based Hedge Fund Research said in April. In Asia, investors redeemed $2.9 billion in the first quarter, the most in seven years, data from eVestment show. That was after big outflows in 2015 as well. Given the massive jolt that just happened, chances are there will be another round of investment calls.This article is silly on many fronts. First, investors don't redeem from hedge funds based on quarterly returns following a major event risk like Brexit. They redeem because of lousy risk-adjusted returns over a longer period.
For the broader market, that could extend Brexit pain a little longer. Investors should watch for liquid assets that hedge funds may sell to meet redemptions in July and August. The rocky start to 2016 has already spurred record sales of U.S. Treasuries by Caribbean-domiciled investors, who are often seen as a proxy for hedge funds and other leveraged accounts. Gold, or highly liquid corporate bonds, could also lose ground because they're easy to sell.
It's true that some winners are emerging, and as usual, when it comes to hedge funds, they're quick to trumpet any success. But outside of machines and a handful of contrarians who picked a Brexit vote, most money managers will have to wear the shock referendum's poor timing.
Had the polling happened on July 1, it would have been a whole other story, giving firms at least a couple of months to recover before having to fess up to investors. If David Cameron wanted a referendum so bad, he could at least have made the timing better.
Second, Brexit? What Brexit? As Keith Bliss of Cuttlone & Co reports, after getting crushed on Friday and Monday, stock markets came roaring back :
If you fell asleep Thursday night and did not wake up until this morning, you would assume that the UK voters elected to stay in the EU. Certainly as we look at the behavior and complexion of the market today, it’s as if nothing happened. As the S&P 500 (SPY) is only 2-3% below last Thursday’s close, the market has voted that Brexit is not that big a deal ... so far.
Sell the rumor, buy the news
The ability of global markets to shrug off what many considered to be a disaster reinforces an important axiom that “news traders” live by: Sell the rumor, buy the news (the converse is true depending upon the situation).
In this case, the rumor was that the Brexit is the first very large crack in the global order that will lead to pestilence, destruction, and economic chaos. The news is that we really still don’t know the ultimate effects and outcome from the decision, and we won’t know for many months. On that news, investors re-engaged the risk markets and picked up massively oversold bargains.
The other important lesson is that hysterical hype rarely drives markets longer term. Even in the most stomach churning market episodes of the recent past — 9/11, Iraq Invasion, financial crisis of 2008, and now Brexit — the equity markets have always shown their resilience. Once calmer minds have a chance to contemplate and game out situations with rational thought, the situations are never as dire as the initial knee-jerk reaction suggests they are. What we are witnessing right now is the quintessence of risk markets: true price discovery based on facts at the moment—not hype or hysteria.
Don't dismiss the Brexit, thoughNo doubt, the stock market is rejoicing probably because most optimistic people believe that Britain will remain in the EU. But make no mistake that Brexit vote was Europe's Minsky moment and if Britain does leave the EU, others will follow and chaos will ensue, which is why central banks are lining up to do the wave.
Now, I am not suggesting that the UK’s pending exit from the EU is a sideshow to be dismissed to the historical dustbin. Quite the contrary is true. This is a monumental event which cuts against the grain of global political and economic thought of the last 60 years. This will spawn many questions about the future economic direction not only for the UK and Europe, but also for the US, China, and the rest of the globe.
Undoubtedly, at some point, it will lead to economic disruption and distortion — even if the breakup is handled with intelligence and thoughtfulness. Heightened market volatility and low rates will be with us for an extended period of time. And, it may lead to a dramatically different global security map than what we currently know.
All of these things will happen … just not now … and that’s what the market cares about.
In fact, I agree with George Soros who recently told the EU Parliament:
Brexit may now be a "greater calamity" than the refugee crisis. He added that the UK's shocking decision has "unleashed a crisis in the financial markets comparable in severity only to that of 2007/8."He continued: "This has been unfolding in slow motion, but Brexit has accelerated it. It is likely to reinforce the deflationary trends that were already prevalent."
I'm not sure this vote unleashed anything comparable to what happened in 2007-2008 but Soros is right, Brexit will reinforce deflationary trends that were already prevalent. This is why bond yields following the vote dropped to record lows and haven't budged since. You can read the full text of his speech here but nobody is paying too much attention to Soros these days.
Although it's still too early to tally up who profited and who lost big following the Brexit, there are some clear winners and losers emerging. On Monday, I discussed who profited from Brexit, alluding to well-known titans like Soros and Druckenmiller but also to lesser known hedge fund managers like Nancy Davis of Quadratic Capital Management.
Now more news is trickling out on who made and lost money following Brexit. Stephen Gandel of Fortune reports that Bill Ackman, one of the world’s worst performing hedge fund managers of the past two years, is once again emerging as one of the biggest losers of the group of elite investors. His fund had lost more than half a billion dollars following Brexit.
And Laurence Fletcher of the Wall Street Journal reports, Equity Hedge Funds Find Themselves on Losing Side of Brexit Moves:
Hedge funds that bet on stocks are starting to emerge as some the biggest losers in the immediate aftershock of the U.K.’s vote to exit the European Union.Indeed, as Reuters reports, British billionaire Alan Howard's main hedge fund, one of Europe's largest, gained 1 percent on Friday after Britain voted to leave the European Union.
Equity funds posting losses were heavily weighted toward so-called cyclical stocks, such as airlines or financial firms, which were hard hit in the selloff, according to company filings and industry experts.
Some were also betting against defensive stocks, such as pharmaceuticals or tobacco, that were already expensive but rallied as investors rushed for havens.
The $2.9 trillion hedge-fund industry has been buffeted by the broad market turmoil sparked by the referendum’s surprising outcome. Details of the how individual funds have coped are just starting to emerge.
“Equity funds are fighting a battle of cyclicals versus defensives,” said Nicolas Rousselet, head of hedge funds at Swiss investment firm Unigestion. “Brexit has been tougher on the cheaper stocks.”
Some equity funds at Man Group, which manages $78.6 billion in assets, suffered losses.
Man Group’s GLG Alpha Select fund, which invests in U.K. stocks, lost 3.5% on Friday, after the results of the June 23 referendum were in. The fund is down 3.8% this year. Its European Long-Short fund, run by Pierre Lagrange, one of London’s best-known managers, lost 1.9% on the day, taking it to a 4.2% loss for the year.
The FTSE fell 3.1% on Friday, while the Stoxx Europe 50 slumped 6.7%.
Egerton Capital also lost money. The hedge-fund firm was co-founded by John Armitage and is one of London’s biggest with $14.7 billion in assets.
The firm, based close to Man Group in the heart of London’s Mayfair district, is down 4.5% this month to Friday after losing around 1% last week. The losses mean it is down 8.5% this year. A spokeswoman for the firm declined to comment.
Lansdowne Partners, one of the world’s biggest equity hedge funds, saw its flagship Developed Markets fund extend losses in recent days. The fund is down 4.1% this month, according to performance numbers sent to investors and reviewed by The Wall Street Journal. Year to date, the fund is down 13.7%.
Marshall Wace’s $10.5 billion Eureka fund extended losses in recent days and was down 1.5% this month by Friday, said a person who had seen the fund’s performance numbers, taking losses this year to 3.6%.
Equity hedge funds inside and outside the U.K. fell an average 2.1% on Friday alone, according to data from Chicago-based Hedge Fund Research.
Most equity hedge funds decided not to buy protection against market swoons because of the high cost of doing so, said Lyxor Cross Asset Research.
In contrast, hedge funds that bet on big moves across foreign-exchange and bond markets are starting to emerge relatively unscathed, with some posting gains.
Many funds that have been hoping for another U.S. interest-rate rise benefited from longstanding bets on the dollar, which soared against the pound and strengthened against the euro in the wake of the referendum result.
So-called macro funds, which place wagers across different types of assets, slipped 0.5% on Friday, according to HFR, better than hedge funds as a whole, which lost 1.1%.
Tudor Investment Corp., of Greenwich, Conn., has gained 0.9% this month to Friday, said a person who had seen the numbers. That gain reduced year-to-date losses to 2.3%. A spokesman for Tudor declined to comment.
Man Group’s $4.6 billion AHL Diversified fund, a computer-driven fund that follows trends in global markets, gained 1.3% on Friday.
Brevan Howard, one of the world’s biggest macro funds, gained around 1% on Friday, taking gains this month to 1.2%, said a person familiar with the fund’s performance.
The big winners from Brexit, however, were quantitative systematic (CTA) strategies. Nishant Kumar and Saijel Kishanof Bloomberg report, Machines Lead Hedge Fund Traders in Brexit Chaos, Braga Wins:
As more details emerged on how hedge funds fared following Britain’s surprise decision to leave the European Union, computer-driven hedge funds led the winners. Human traders appeared to have limited losses by reducing risk.I hope Crispin Odey locked in those big gains because markets have been on fire since Tuesday and he's a well-known Euro bear who was down huge in the first four months of the year.
Lynx Asset Management, which uses mathematical models to decide when and which securities to buy and sell, posted a 5.1 percent gain on Friday in one of its funds, according to its website. Capital Fund Management, a $7 billion firm in Paris, gained 4.2 percent that day in its Discus fund, while Systematica Investments, the $10.2 billion fund run by Leda Braga, gained 1.35 percent in its main BlueTrend fund, people with knowledge of the matter said.
Trillions were wiped from global equity values and the pound slumped after the Brexit victory, with the U.K. stripped of its top credit grade by S&P Global Ratings. Hedge funds overall lost 1.1 percent on Friday, according to the HFRX Global Hedge Fund Index. In a sign traders had prepared for the event, options-derived measurements of market stress fell Monday despite a second day of weakening stocks.
“We are entering a new regime of higher volatility where prices are vulnerable to sharp reversals and breakout of new trends,” said Nigol Koulajian, founder and chief investment officer of Quest Partners, a $650 million quantitative hedge fund. “Years of aggressive Central Bank policies suppressed volatility across markets and this is now changing as macro and political risk begin to rise.”
Quest, based in New York, gained 1.6 percent on Friday and 3.6 percent on Monday in its main fund, AlphaQuest Original Fund, a person familiar with the matter said. (click on image)
Quantitative Investment Management, a computer-driven firm based in Charlottesville, Virginia, gained 3.6 percent on Friday and 12 percent this month before fees in an equity strategy that manages about $500 million, a person with knowledge of its returns said. The performance adds to a gain of almost 30 percent after fees in the first five months of this year.
The firm’s main futures strategy, which manages about $2.5 billion, also made money on Friday, bringing gross returns for June to 4.2 percent. Before this month, it had gained 7.7 percent, net of fees, in 2016.
Man Group Plc, the world’s largest publicly traded hedge-fund firm, reported a 1.3 percent gain in AHL Diversified Programme and 0.9 percent rise in AHL Alpha Programme. Its AHL Evolution Programme lost 0.5 percent, while the AHL Dimension Programme declined 0.7 percent, according to the firm’s website.
Other computer-driven funds that profited include Winton Capital Management in London, whose founder David Harding gave 3.5 million pounds ($4.6 million) to the Remain campaign.
Officials for the hedge funds declined to comment on performance. Many funds will update investors on their June performance this week and next.
Macro Funds
George Soros, the billionaire who gained fame by successfully wagering against the pound in 1992, said he was betting on the currency leading up to the vote. In the days before, Soros had warned that sterling could slump more than 20 percent against the dollar as voters were grossly underestimating the true cost of the U.K. quitting the EU.
Soros made money on other investments that were designed to profit from falling markets, a spokesman said Monday. His Soros Fund Management took a short position in Deutsche Bank AG of about 7 million shares Friday as bank stocks tumbled.
Soros built his reputation as a macro investor, a strategy that seeks to profit from economic events and trends by trading everything from currencies to commodities. Macro funds that made money on the U.K. vote include Graticule Asset Management, run by Adam Levinson, people with knowledge of the firms said.
Macro hedge funds had a low level of risk on before the decision, according to a survey last week by research firm Drobny Global Advisors LP. Such funds are likely to have posted performance ranging from losses of 2.5 percent to gains of 0.5 percent in the aftermath of the vote, Philippe Ferreira, head of research at Lyxor Asset Management, said in a report.
Nonetheless, a macro hedge fund run by H2O Asset Management slumped 14.4 percent on Friday, according to data compiled by Bloomberg. The H2O Vivace fund had managed about 209 million euros ($232 million) at the end of May, according to its website.
Stone Milliner Asset Management, the macro fund run by Jens-Peter Stein and Kornelius Klobucar, lost 0.2 percent in the Class A shares, Series I version of its fund this month through Friday, according to an investor update. It has lost 1.2 percent this year.
‘Surprising Turn’
Discovery Capital Management LLC, the macro fund run by Robert Citrone, posted a 0.5 percent gain for the month in its Global Opportunity Fund through Friday and a loss of 2.5 percent for the year, according to an investor update. The fund said the highest conviction short wagers in its portfolio are in the U.K. and European equity markets.
“With a Remain vote, we had believed risk assets in general would have had a sharp rally over the next 3-4 weeks, from which a meaningful correction would have unfolded,” the South Norwalk, Connecticut-based firm said. “This surprising turn of events has accelerated our roadmap that we had for the August-October time frame.”
Hedge fund manager Crispin Odey, an advocate of a British exit, posted a 21 percent gain over Friday and Monday in his main fund, according to an e-mail to investors. Odey had conducted a private poll ahead of the decision showing the vote was much closer than financial markets expected.
But it looks like once again the quants are thriving in this uncertain environment. We'll see if they can keep it up in the second half of the year.
Speaking of quants, the king of quants, James Simons, Renaissance Technologies founder and billionaire philanthropist, made a rare appearance on CNBC to discuss markets, politics and his comment on what the next president's No.1 priority should be.
Normally I don't pay attention to the political views of hedge fund gurus but I must admit, I really enjoyed listening to Simons speak his mind on markets, Brexit, Trump ("He has a terrible Sharpe ratio") and more importantly on the need to build America's crumbling infrastructure (I think US public pensions should be part of the solution). Watch the clips below.
I also embedded a clip where George Soros told the EU Parliament Brexit has aggravated looming dangers in the markets, including a crisis in financial markets.
I end by wishing my many supporters who congratulated me on my blog's eight year anniversary a big thank you. Eight years later and over 5 million viewers, I'm still blogging away and enjoying it. Not bad for a guy with progressive Multiple Sclerosis (it's been 19 years since my diagnosis in June 1997) which goes to show you, if you put your mind to something, nothing will stop you except for your own fears and self-doubt.
On that note, please remember to show your support for this blog via your PayPal contributions on the right-hand side under my picture.
I'm taking a break to celebrate Canada Day tomorrow and mourn the loss of P.K. Subban who was traded away to the Nashville Predators in a shocking move that left Habs fans dumbfounded. Oh well, Go Habs Go but it won't be the same without P.K. in the lineup. Enjoy your long weekend and Happy Canada Day and 4th of July!
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