“Brexit is a game changer for hedge funds”

Investment strategy - 7/22/2016

Following the last meeting of our Investment Committee, the July-August edition of “INVESTMENT STRATEGY” has just been published. In addition to the pages given over to the various asset classes and our investment scenario, this summer issue includes an interview with Roland Eberhard, Head of Alternative Multi-Management.

Is Brexit relevant for hedge funds?

We view Brexit as a game changer. Until recently, risk markets in general were expensive and priced to perfection. Something had to give. The Brexit vote turned out to be this catalyst. Financial markets worldwide are likely to remain in turmoil as the long and complicated process of political and economic separation from the EU is negotiated. Uncertainty is the main certainty. Market volatility will remain elevated as Europe prepares for contagion of the British referendum.

Higher levels of volatility should be beneficial to market neutral strategies. We see an increased interest in macro and CTA strategies, particularly those that are run with a long vol bias. Market dislocations should provide alpha opportunities, specifically in the rates and foreign exchange markets.

Were hedge funds prepared?

While the Leave vote was unexpected, hedge fund managers were generally prepared for a Brexit contingency. No systemic operational or counterparty risks have materialized to our knowledge. In credit markets liquidity concerns did not materialize either.

What were some of the winning trades?

Many market neutral managers had on tail hedges that did well in the aftermath of the vote. Discretionary macro and systematic CTA’s profited from being long sovereign bonds and long gold. Short GBP and the overall volatility in FX markets was a major positive contributor as well.

The Regulatory Environment has increased. How does this impact hedge funds?

Proprietary trading by large banks was in direct competition with hedge funds. A major factor of increased regulation since the Financial Crisis is the strong reduction of trading activity by Investment Banks.

Take Merger Arbitrage as an example. Hedge funds can again profit from attractive spreads in announced corporate mergers as they could say twenty years ago. This is only one example of several traditional arbitrage strategies that have again become attractive.

Hedge Fund Research published data stating that in the past two quarters more hedge fund closed than new ones started. What do you make of this development?

Indeed, during Q1 2016 they noted 291 closures versus 206 funds starting. The environment for hedge funds remains competitive. However, we observed a rise of new fund launches when investment banks closed proprietary trading desks.

Any thoughts on the market environment?

The static monetary policy of the last seven years conditioned investors not to react to developments. Watch out if blind buyers become blind sellers. Investors can no longer rely on Central Banks and Governments to prop up assets. We could see a rushed outflow from beta chasing ETF’s.

Passive investing is the name of the game in a bull market. Now that investors have realized that the bull market in risk assets is over active investing is attractive again.

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