Steinbrugge: Brexit Will Increase Demand for Uncorrelated Hedge Fund Strategies

Jun 24 2016 | 2:15pm ET

Much is being written and discussed about the impact of the UK vote to exit the European Union. Agecroft Partners is among those that believe the impact from Brexit on the financial markets and global growth will be long lasting, primarily because the uncertainty of its implications will take a long time to unfold. There is speculation that other countries will follow, reducing economic growth in Europe.

Further exits could have profound economic implications for the weakest economies within the euro block, which have been propped up by stronger members. When uncertainty increases investors require a higher return for their invested capital. This often leads to a widening of credit spreads  and a decline in equity valuations..

As a result, we expect to see an accelerated increase in demand for hedge fund strategies with low correlations to market benchmarks. The interest for these type of strategies began to increase after the market volatility last August and has continued through the first half of 2016.

Higher beta strategies will likely be perceived as higher (and unnecessary) risk. Some of the strategies that will see a significant increase in demand include: relative value fixed income, market neutral long/short equity, CTAs, direct lending, volatility arbitrage, reinsurance and global macro. These strategies will see an increase in demand for both  their perceived ability to generate alpha (returns unrelated to  market direction) and as a hedge against a potential market sell-off.

This uncertainty will increase both hedge fund redemptions and re-allocations as money is shifted throughout the hedge fund industry. Only time will tell which specific hedge fund organization will benefit and which will suffer.

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