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Will hedge funds profit from short-selling a no-deal Brexit?

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Amidst the ‘fog of war’ surrounding Brexit, one rumour that keeps swirling around is that a number of hedge fund managers who ‘directly or indirectly bankrolled Boris Johnson’s leadership campaign’ in the summer and/or donated to the Leave campaign in 2016, are set to profit handsomely from the potential chaos of a no-deal Brexit. But as Tanzeel Akhtar asks, is this really a ‘hedge fund heist’ as some claim or just prudent portfolio positioning?

Crispin Odey, a London-based hedge fund manager and the founder of Odey Asset Management reportedly gave GBP870,000 to the Leave campaign and then made GBP220 million overnight as sterling slumped following the 2016 referendum result. 

The morning after he told the BBC: “There’s that Italian expression – ‘Il mattino ha l’oro in bocca’ – the morning has gold in its mouth, and never has one felt so much that idea as this morning.” Since then Odey’s hedge fund lost 12.7 per cent in September, according to numbers sent to investors and reviewed by the Financial Times. 

Odey has dismissed claims his support is motivated by an opportunity to make millions from short-selling UK companies and the pound as “absolute rubbish”. Recently the former chancellor, Philip Hammond also questioned the political connections of some hedge fund managers who have backed a no-deal Brexit. Odey meanwhile, has declined to comment further on the matter.

Commenting on Odey’s sudden gain and loss, Charles Phan, founding engineer of Interdax, says: “You can be right about events and still lose money. Odey is the case in point, he supported Brexit and positioned his fund short, but they ended 2016 down nearly 50 per cent. He was right about the event but wrong about the effects, as UK stocks climbed for the rest of the year. Trading is not just about guessing what political events will happen, but also risk management.” 

Don Steinbrugge, the founder and CEO of Agecroft Partners, explains: “The profits will not be as high this time around compared to when the original vote took place. Huge profits are made when someone has an information advantage over other investors, which is not the case currently.”

According to Steinbrugge most of the information is priced in to securities resulting in both UK and European equities trading at a huge discount to the US.

The act of short-selling, which can make investors billions, involves borrowing currency or shares and selling immediately in the hope of buying them back later for less and pocketing the difference. For decades, politicians have alleged that short-selling can cause market declines and recessions and huge money can made by those prepared to take huge risks.

One high profile case involves George Soros and who is known as “the man who broke the Bank of England” when he made USD1 billion in one day by short-selling sterling ahead of the UK currency crashing out of the European ERM on Black Wednesday – 16 September, 1992.

“He [Soros] guesses everything wrong politically but somehow ends the year doubling his investors’ money,” says Phan. Are managers looking to profit from the political situation? Sure, managers are always looking to profit. But they will try to position themselves according to what they think is likely, rather than get a position and make the politicians do what they think will help that position.”

So could a no-deal be an investment opportunity? Phan adds: “Of course. But there’s no reason why you have to be short to make money. It’s not like someone is a short seller forever, and so needs things to always be going down. It might as well be an opportunity to go long,” adds Phan. 

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