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How hedge funds can navigate Brexit and Covid-19 trade upheaval

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The sweeping changes and far-reaching trade upheaval brought about by Brexit and Covid-19 heralds sizable investment opportunities for hedge fund managers, according to a new study by IG Prime.

The report – ‘An Analysis of Post-Brexit Economies’ – examines the impact of Brexit on international trade, gauging potential growth areas in specific sectors, and considers the broader trends unfolding from evolving international trade patterns as a result of the UK’s decision to leave the European Union.

Specifically, the report probes the UK’s main exports prior to Brexit – such as precious metals, vehicles, and pharmaceutical products – as well as the main exporters of those same products in the EU and Singapore, in order to determine which countries may be set to increase exports. It also looks at the impact of the Covid-19 impact on trade over the course of 2020.

With commodity supplies from the UK decreasing, and existing contracts coming to an end, hedge fund managers should closely monitor the potential for certain product industries to open up even more in the coming years, said IG Prime, the institutional prime brokerage unit of IG Group.

“This may mean that companies still based in Europe continue to expand, while the broader import opportunities may also result in growing numbers of start-ups in those product areas,” the report explained.

Despite the coronavirus crisis beginning to subside in some countries, IG Prime sounded a note of caution on this expansion trend, which is unfolding against a backdrop of sustained market volatility, with “even enterprising investment managers” needing to “tread carefully”.

“While of course this comes with stronger elements of commodity risk, and there may be fewer opportunities for new breakouts in established areas like petroleum and derivatives, other products like machinery may see a wealth of start-ups appearing in countries like Germany to fill the gap left by the UK.”

Similarly, the report indicated that much of Brexit’s impact has been delayed by the effects of the Covid-19 pandemic, adding that further trade will likely follow “a more complex course” than it has up to now.

As a result, hedge funds may choose to consolidate their hedging strategies while the international market’s changes remain unprecedented, “rather than pushing through the immediate risk,” with a clearer image of international trade likely to have formed by the end of 2021 as the effects of coronavirus subside and the true impact of Brexit unfolds.

Chris Beauchamp, chief market analyst at IG Group, said the UK’s vote to leave the EU in 2016 represented a “huge leap into the unknown”, adding that Covid-19 has served up an additional layer of complexity to international trade and cross border investments.

He said: “Some hedge funds who aren’t swayed by volatility may focus on shifting investments in Europe from the UK to a short-term spread across smaller economies like Croatia and Ireland. Once the effects of the pandemic subside and a clearer picture of Brexit emerges, many are likely to move back into the UK.” 

Underlining this point, the report noted certain industries – such as organic chemicals – have not experienced the same degree of Brexit-related upheaval as other sectors, since the bulk of UK trade was with the US.

“Simply moving out of Europe isn’t necessarily a barrier to the UK’s value – indeed, a change in trade agreements might bring new UK opportunities elsewhere,” the report observed.

Beauchamp added: “The combination of Brexit and Covid has unveiled opportunities for hedge funds to think about invest more broadly than before.”

Max Hayden, global head of prime brokerage sales at IG Prime, said smaller economies offer unique opportunities, but also cautioned they remain higher areas of risk. 

“Short positions may see more benefit as the larger initial gains steady out, but hedge funds and family offices looking for more steady growth would likely be better served focusing on countries with existing economic infrastructure to support the transition from UK to European trade,” Hayden observed.

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