Recession-hit UK now a “difficult sell” for investors, with potential concerns for hedge funds

The UK’s slide into recession could squeeze investor flows into the country, carrying far-reaching implications for hedge funds focused on UK markets.

Data released this week shows UK GDP contracted by 20.4 per cent between April and June – the biggest fall on record – pushing the country officially into recession for the first time since 2009, during the Global Financial Crisis.

Tom Reeves, head of research at Murano, the London-based research-focused platform that connects global investors with alternative asset managers, described the UK’s second quarter numbers as “concerning”, particularly when compared to its peers.

The UK’s recession, coupled with the scheduled end of the furlough scheme in October and the “glacial pace” of the ongoing Brexit negotiations, makes the country as a destination for capital “a somewhat difficult sell”, Reeves told Hedgeweek on Thursday.

He pointed to differences in attitudes between European and US institutional investors towards the UK as a destination for capital. The UK’s withdrawal from the European Union weighs more on European institutional investors’ minds, seeing it as a loss of a trade partner. But US investors “tend to be more sanguine”, Reeves said, seeing Brexit as a decoupling from European economies which have their own issues to contend with.

“Both sets of views are true,” he added. “But we do hear in our conversations with institutional investors in Switzerland, for instance, that despite not being in the EU, they see Brexit as being something that’s a concern.

“If capital flows are muted from Europe, that’s a concern for some hedge fund strategies that might be more UK-centric,” he said of the potential fall-out from the hit to the economy.

Elsewhere, Reeves believes the demand among investors for distressed credit and special situations hedge fund strategies which soared in the aftermath of March’s market crash has now subsided.

“The initial rush to try and do manager research into those areas has been done. Institutional investors are now almost two quarters on from lockdown, and now it’s a case of looking at other catalysts instead,” he said.

Among other things, allocators are now monitoring what Reeves said is the “big dislocation” between “what the macro numbers are telling us and where the equity markets are at the moment.”

He said: “The major dominating narratives that investors are looking towards are things like the US election, how the US economy rebounds, and whether we will see the UK economy rebound following the easing of lockdown.”