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US fund managers seek options to hedge against Brexit risk

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So far in the media, Brexit has been discussed from an essentially British perspective. But the implications – especially in the case of a no-deal departure from the EU – could have an impact far beyond the borders of the UK. Marianne Scordel of Bougeville Consulting looks at some of the steps US fund managers have taken in an attempt to Brexit-proof their businesses…

The referendum took place over three years ago now, and the whole process can be compared at times to a cat crying to leave the house, only to remain on the mat once the door is opened, unsure as to whether to venture out or not. 

While the storyso far has mainly focused on the cat – a metaphor for Britain – the rest of the world has had to deal with the situation, in a reactive way, and in the midst of political uncertainly not experienced in the Western world for decades. 

As we approach the exit date of 31 October, it is worth asking how fund managers who may have chosen the UK to do business have been coping with the situation. 

Over the past three years I have spoken regularly with managers in America who have experienced confusion to say the least and, in some cases, have been exploring ways of preparing for the big event, commensurate with their level of historical presence in Europe, their size, and their appetite in the longer term. 

Managers of smaller operations with no existing presence in Europe have had an easier ride it seems. 

Joe Saint Veltri, Founder and Manager of US hedge fund and Hedgeweek Award Winner Ouroboros, had had plans to open an office in Europe. While three years ago his question was one of asking where to open his office – Britain no longer being the most obvious choice – he has now shelved his plan altogether and has, instead, focused on adapting his product to his European investors, while deciding he would do nothing for now with respect to his management company. 

“We don’t want to set up in a country that has no trade agreement with its neighbours,” he said in a recent conversation. “This is a volatile situation in terms of market environment also, so we are monitoring it from an investment perspective, too.” 

When asked about the extent to which Brexit impacted his decision, Saint Veltri is quick to add that “Brexit in itself was not a deal killer. There was also the fact that, all things considered, it made more sense to keep just the US office. Our plan in Europe was a little bit esoteric, we were going to partner with a local family office, and, in the end, given the overall situation, we decided to be more vanilla and to strengthen our blueprint in the US first.” 

While avoiding taking a risk you do not have to bear may be a wise business strategy, this has not been an option for larger operations with an existing presence in the UK. 

A wealth manager and multi-family office with a large presence in the US (1,000-plus) and a medium size operation in London (around 70 people) explained that the company had filed a request for authorisation with BaFin, the German regulator, in order to open a small branch locally from which to passport the entity in case the UK leaves the EU with no deal. 

Until now, from the perspective of an American manager, one of the advantages of doing business out of the UK in order to cover Europe was that it was possible to work all over Europe from London, on the basis of what European regulators call a “passport.” Even though the exit date is barely a few weeks away, it is still unclear at this stage whether this option will still be available after Brexit. 

The UK’s Financial Conduct Authority has put a “temporary regime” in place for incoming firms (ie firms established in Continental Europe seeking to do business in the UK). However in most cases, regulators across Europe have not offered such an option, prompting several overseas companies with only a presence in the UK to prepare to have a presence in Continental Europe. 

“In a way, this brings us back to the model of client franchise that prevailed in the 1990s,” says the CEO of the manager who filed to open a branch in Germany. “When prop trading was big, suddenly large firms’ local presence across Europe did not matter so much, whereas now we are going back to a model where we have a local presence. Our filing in Germany is a way to hedge Brexit risk, but it is also part of an overall evolution in our industry.”

While the German branch is not yet open – the company will press the button and hire staff locally only if the passporting option from the UK is no longer available as a result of a “no-deal Brexit” – other firms, with a stronger presence in Europe, have already followed through with their plans. 

This is the case with another US wealth manager and multi-family office whose management saw a business opportunity to open a small office in Paris, without changing the scale of its presence in London. 

“We still have about 100 people in London and we are not planning to change anything,” says one of the firm’s US-based portfolio managers who regularly travels across the Atlantic. “The pound is cheaper now, it is cheaper to have a presence in London and we also look at this on the margin.” 

While various countries in Continental Europe have been competing to attract business in the aftermath of Brexit, Ireland seems to be the big winner so far, for financial services overall. To date, there has not been any universally accepted objective study, however, experience shows that Paris is generating some interest, with BlackRock seeking permission to manage alternative funds out of the French capital while maintaining London as its European headquarters. 

There have, therefore, been various ways that US fund managers have looked to prepare for the potentially high impact event that is Brexit, but the modalities have yet to be specified. No doubt the next few weeks will provide some answers, as much as they will raise other questions.  

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