Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management

Hedge Funds Resilient in Front of Rude Brexit Awakening

28 Jun 2016

Investment Partners

The leave camp won in the historic EU referendum and the decision rattled markets. The UK has voted by 52% to 48% to leave the EU. The referendum turnout was 71.8%, the highest at a UK election since 1992. The long term implications of the vote are massive. Optimists see this as an opportunity to reshape the EU on firmer grounds. But in the short to medium term it is a huge setback for the EU and brings large political challenges for the UK (Cameron announced his resignation - to be effective in three months; Scotland could seek independence again; Sinn Fein raised the prospect of a referendum on Irish reunification). In the words of Tony Blair, the Brexit vote has “seismic consequences”.

Market reaction

Risk assets were under heavy selling pressure at the opening in Europe on June 24th, with financials down by double digits. Over the course of the day, risk assets found a floor as central banks stated they stand ready to act. Meanwhile, safe havens such as sovereign bonds in the UK and in core EMU countries moved higher, as well as precious metals and the JPYUSD cross. The outcome of the vote has triggered widespread reactions from the authorities and this may continue over the next days. Such actions have the potential to tame market uncertainty but it seems too early to chase opportunities in our view.

Hedge fund performance

The industry tends to protect portfolios under such circumstances and initial estimates are rather comforting. CTA outperform and stand in positive territory post-Brexit (in the +2-3% range for the day). Macro managers have the potential to take advantage of such market disruptions but the range of their performances is likely to be wide (in the -2.5%/ +0.5%). Some macro managers were actually long equities going into the vote. We estimate that L/S Equity managers are down, but their negative performance is expected to remain in a moderate range, say -1/-2%. Event-Driven have a higher beta than other hedge fund strategies but are mainly exposed to the US market. They could be down in the -2/-3% range. Finally, the assets traded by L/S Credit could face liquidity issues and performance estimates are more hazardous. Yet, several managers cut exposure to financials ahead of the vote.

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