The Strategist

Brexit announcement hits hedge funds

04/24/2017 - 14:28

Hedge funds suffered losses after British Prime Minister Theresa May shocked the markets last Tuesday by announcing early elections to be held on June 8. At that, funds headed by people were outwitted by those headed by artificial intelligence, writes Reuters.

This proved that computer-minded funds, which showed themselves well after the British vote on Brexit last June, failed the first serious test this year.

Among the most notorious losers was a Connecticut investment company AQR Capital Management with its $ 13.3 billion-worth computer program Managed Futures Strategy. The company lost 1.1%, or more than $ 130 million.

The same strategy after the British referendum vote in June last year brought an increase of 5.2%.

Philippe Ferreira, Head of Research at hedge fund Lyxor Asset Management, noted that the announcement of early elections was a turning point for the markets, and reversed trends for all British assets. Consecutively, this damaged computer-managed hedge funds.

Most machines-managed hedge fund strategies suffered losses against the backdrop of recent events as their algorithms simply follow the market momentum. Thus, a gap in the trends that identified these algorithms, as a rule, affects them adversely.

An unexpected announcement of elections led to an increase in the pound sterling to a six-month high above $ 1.29. And the British stock index FTSE 100, which tends to reverse movement against the pound, has experienced the most serious drop since the vote on leaving the EU. At that, it reached its peak in the last month.

Computer-controlled funds tend to follow general trends, while human traders try to predict macroeconomic developments and react to them in case of discretionary macro managers.

Human-managed hedge funds, which mainly place their bets through currencies and bonds, also suffered losses, even though to a lesser extent.

Not only investors, but also banks and ordinary citizens are already suffering from the consequences of Brexit that has not yet come. Head of The Bank of England, Mark Carney, speaking at the Institute of International Finance in Washington, said: "Brexit will become the litmus test for international cooperation in future ". 

The UK’s decision withdraw from the European Union may frustrate plans to strengthen the financial system, said the British Central Bank’s governor. If the country leaves the single European market, then the "passport rights" that automatically allow banks, fund managers and insurance companies of the United Kingdom to freely sell their services in the territory of the European Union, will be lost automatically, Carney believes. 

Head of the Bank of England also added that banks’ violations cost the global economy $ 5 trillion. This amount could go to lending. "Losses from illegal actions of world banks have already exceeded $ 320 billion. This money could be used to provide loans for $ 5 trillion for households and businesses", explained Mark Carney.

It is expected that 18.8% of UK creditors will limit availability of unsecured loans to consumers over the next three months. This was proved after a quarterly study of the Bank of England’s lending conditions.