HFR: Hedge Funds Largely Mixed on Brexit Friday

Jun 28 2016 | 8:06pm ET

As the dust settles around the Brexit and the extraordinary dislocations in global currency, equity, commodity and fixed income markets that have occurred as a result, initial data suggests hedge funds as a whole were mixed in their ability to navigate the intense volatility.

Defensive, hedged positioning across sterling, equities, and gold helped mitigate losses on the day after the referendum, according to recent data from leading index provider Hedge Fund Research. Equity managers were under the most pressure, while quantitative and trend-following CTA’s posted gain on Brexit Friday. 

Performance was characterized by wide dispersion and high turnover, noted HFR. The HFRX Absolute Return Hedge Fund Index lost -0.18 percent on the day, while the HFRX Equal Weighted Index declined -0.76 percent. Losses across directional beta strategies were partially offset by mixed performance in non-directional and trend following strategies. 

Details of HFR’s roundup of Friday index performance:

  • The HFRX Macro: Systematic Diversified/CTA Index gained +0.71 percent on Friday.
  • The HFRX Macro Index, which includes both fundamental & quant CTA strategies, posted a decline of -0.55 percent, as positioning in the British Pound Sterling, Japanese Yen, Euro, Gold, global equities and fixed income all contributed to Friday performance.
  • The HFRX Relative Value Arbitrage Index posted a narrow decline of -0.25 percent as yields declined sharply across government bonds, high yield credit widened and equities posted steep declines. 
  • The HFRX Convertible Arbitrage Index was essentially flat with a narrow decline of -0.07 percent as rates fell sharply, volatility spiked, credit widened and equities declined.
  • Directional equity beta and Event Driven strategies posted declines. The HFRX Event Driven Index posted a decline of -1.07 percent on Friday; the HFRX ED: Merger Arbitrage Index posted a narrow decline of -0.02 percent for the day. 
  • The HFRX Equity Hedge Index posted the largest decline across main hedge fund strategies on Friday, falling -2.13 percent.

Nowhere was the impact of the Brexit vote more keenly felt than in sterling, which reached levels not seen since Margaret Thatcher was prime minister. The decline, and which side of it a fund manager was on the day after the vote, will loom large in many fund results for June. This may be especially true for U.K.-based macro funds, which were reportedly heavily long sterling heading into the vote. 

Britain is a major domicile for global hedge funds, with U.K.-based firms managing an estimated $426.4 billion in assets, or approximately 80% of the $527.6 billion managed by all European hedge funds.

“Many hedge funds were defensively positioned coming into the vote, reflecting expectations for a close popular vote as well as the systemic risks associated with a surprise result,” stated Kenneth Heinz, president of HFR. “[This was] heightened by gains in sterling and equity markets leading into the vote. 

“Many hedge funds had entered Brexit risk trades in 2H15 and had profitably exited these prior to the vote, reflecting the asymmetric risk profile these trades carried as a result of the disconnect between polls and financial market expectations for the vote outcome,” he added. “Managers are and have been positioned for this dramatic increase in volatility to persist over an intermediate timeframe, reflecting an enhanced opportunity set for funds which are able to operate as liquidity providers through this turbulent period of heightened risk and uncertainty.”

Established in 1992, HFR is a global leader in specializing in the indexation and analysis of hedge funds. The company produces the HFRI, HFRX and HFRU Indices, industry benchmarks for global hedge fund performance, and calculates over 100 indices ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus.

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