A ‘patriotic bias’ towards London-listed stocks has increased among UK hedge funds during the Covid-19 pandemic, and is stifling managers’ efforts to diversify portfolios, according to a new industry survey.
A ‘patriotic bias’ towards London-listed stocks has increased among UK hedge funds during the Covid-19 pandemic, and is stifling managers’ efforts to diversify portfolios, according to a new industry survey.
Institutional prime broker IG Prime surveyed 250 hedge fund portfolio managers and hedge fund traders, exploring what influences their diversification strategies, the internal and external factors shaping investment decisions, and what they consider when trading internationally.
A remarkable 96 per cent of hedge fund respondents believe UK stocks to be more successful compared to other markets – despite US equities outflanking those in the UK during the course of the Covid-19 pandemic.
This indicates a ‘patriotic bias’ which is influencing portfolio asset allocation decisions at UK hedge funds, IG Prime said.
“Our survey data shows that hedge funds have been focused on the markets they know best and are most comfortable trading in,” said Chris Beauchamp, chief market analyst at IG Group.
“Although markets like the US have significantly outpaced the UK, ‘safe’ investments that managers feel more confident will produce a return are likely to be prioritised over ‘riskier’ investments – despite the potential for enhanced profits.”
The report probed the internal and external factors weighing on hedge funds’ investment decisions and portfolio-building process.
Despite their general faith in UK equities, more than half – 57 per cent – of those quizzed said ‘pressure from management’ was a factor to diversify outside of UK assets, while an equal number cited a desire to ‘benefit from other strong performing markets’.
Of the two, 59 per cent of portfolio managers said that management pressure was the reason for diversification, and 53 per cent said it was to ‘benefit from other strong performing markets’. Hedge fund traders, on the other hand, appear more focused on performance – with 52 per cent citing management pressure compared with 65 per cent naming strong performing markets exposure. They also prioritised balancing risk (64 per cent) and minimising volatility (65 per cent).
The report said: “Despite the overall confidence in UK stocks, the reported pressure to diversify may come as a result of general economic uncertainty brought on by the pandemic and geopolitical influences such as the US elections and Brexit, which could be among some of the factors that have helped the US economy outpace the UK’s.”
Elsewhere, some 46 per cent of survey participants said they still felt cautious about trading in international markets due to lack of experience, while another 46 per cent of all respondents also said they were concerned about the impact of political volatility on markets. Another 45 per cent named different trading legislation as a barrier to trading stocks in markets outside their main domicile.
Pre-pandemic, some 59 per cent of UK hedge funds said that they had dedicated between 76–100 per cent of their portfolio to UK investments. That number has since grown to 63 per cent. At the same time, there has also been marginal shift towards European stocks since the pandemic began, IG Prime noted, with the number of hedge funds investing 26-50 per cent of their portfolio to European stocks rising from 6 per cent pre-pandemic to 8 per cent.
“Although home bias was a significant factor in hedge funds’ portfolios before the pandemic, patriotic investing has since increased as investors have directed more of their funds to UK stocks,” the survey observed.
“Meanwhile, the slight increase in European investments may be the result of local political uncertainty brought on by Brexit, which may have led to some investors seeking to profit off European companies that stand to benefit from the shakeup in EU trade. However, it’s worth noting that the increase in European investments is minimal and may not be indicative of a wider trend.”
Beauchamp said: “It’s no surprise that hedge funds would look to mitigate as much risk as possible during a time of crisis, and if lack of knowledge and experience of a certain market is to be deemed a risk then it would appear that this mitigation is a driver of continued ‘patriotic investing’ during the pandemic.”
The study follows recent research published jointly by the Alternative Investment Management Association, Simmons & Simmons and Seward & Kissel which showed a marked increase in UK hedge funds’ confidence in their business prospects over the coming year, outpacing sentiment among US, EMEA and Asia Pacific-based managers.
