Hedge fund managers have become more upbeat about the Brexit result in the intervening five months, according to a new report published by Preqin.
Preqin surveyed 276 hedge fund managers and 108 investors in November 2016 to see how their views on Brexit have changed since the referendum result. The report – Impact of Brexit on Hedge Funds – combines the results of that survey and comprehensive data taken from Preqin's online services.
As the majority of fund managers believed the UK would vote to remain in the UK (71 per cent), it is unsurprising that a large proportion were caught out by the immediate market turbulence.
In July, 34 per cent of firms thought Brexit had negatively impacted their performance in the aftermath of the vote, although 27 per cent managed to capture this volatility and boost returns.
Since then, managers have been able to navigate the market more adeptly, despite the vote still considerably affecting performance. In November, just 21 per cent of firms have seen a negative impact from Brexit over H2, while 32 per cent have seen their performance affected positively.
Going forwards, a quarter of hedge fund managers expect the impact of Brexit to be positive for their portfolios, and now the industry has an opportunity to prove its value in generating non-correlated returns.
Investor confidence in the UK also seems to have returned since the referendum. Immediately after the referendum, 31 per cent of hedge fund investors expected to invest less in the UK over the next 12 months, and 24 per cent expected to invest less in the longer term. As of November, those proportions have fallen to 21 per cent and 18 per cent respectively, while the proportion looking to invest more in the UK over the coming year has risen from 7 per cent in July to 13 per cent currently.
UK- and Europe-focused hedge funds incurred steep losses in June 2016, immediately following the referendum result. However, both have more than recovered those losses in Q3, and as of the end of October are showing YTD gains of 1.91 per cent and 0.99 per cent respectively.
The majority of investors do not think Brexit will alter their hedge fund commitments in either the EU or the UK. Three-quarters of investors plan to invest at the same level in the UK over the long term, while 81 per cent of investors will maintain their current level of investment in EU-based hedge funds.
Although the majority (70 per cent) of UK-based hedge fund managers surveyed in November do not anticipate changing location, this proportion has shrunk since July (80 per cent). Meanwhile, a greater proportion of firms (24 per cent) are now uncertain of their position compared to five months ago (17 per cent).
The UK is still home to the majority of hedge fund industry participants. Preqin tracks 944 EU-based hedge fund managers of which 590 (63 per cent) are headquartered in the UK, and 757 EU- based investors of which 408 (54 per cent) are located in the UK.
As of 30 September 2016, the UK hedge fund industry dwarfs that of the rest of the EU market. The UK-based industry currently holds USD500 billion in assets and has expanded by USD28 billion since March, while the EU market (minus the UK) is worth USD140 billion, and has grown by USD2 billion since March.
“The UK’s decision to exit the European Union was largely unexpected by the hedge fund industry – 71 per cent of managers surveyed in early June 2016 believed that Britain would choose to remain in the Union,” says Amy Bensted (pictured), head of hedge fund products at Preqin. “As a result, in the immediate aftermath of the decision, more hedge fund managers reported that Brexit had negatively affected performance than positively and we saw UK- and Europe-focused funds make losses in June. Fast-forward five months, and Preqin’s survey of fund managers in November 2016 reveals that hedge funds have been able to better capture the volatility arising as a result of the referendum and generate better performance. Looking forward into 2017, more hedge fund managers continue to believe in positive Brexit impact on their portfolios than a negative one going forwards.
“Given that the UK government has yet to trigger Article 50, it is unsurprising that uncertainty still prevails about the wider impact of Brexit on the hedge fund sector. Until these effects become clearer, the majority of hedge fund managers and investors are conducting their business as before. However, they will be keeping a close watch on any further Brexit developments over the coming months, as well as possible further complications represented by upcoming French and German elections.”