Hedge funds sense profit in shock waves after Brexit

London

HEDGE-FUND managers are sensing opportunity. After enduring the worst first-quarter returns since the start of the financial crisis, the prospect of Britain voting to leave the European Union is creating the market turmoil that can make them money.

As shock waves reverberate through the region in coming weeks and months, measures of volatility could double and currency swings mirror market turmoil last seen when Lehman Brothers Holdings Inc collapsed in 2008, according to Stephen Isaacs at Alvine Capital Management Ltd in London. A vote to leave will "exponentially" increase the likelihood of the EU breaking apart, triggering opportunities as assets are repriced across the region, said Luke Ellis, president of Man Group Plc.

"The impact will be well beyond what everybody is talking about," said Mr Ellis, whose firm oversees US$78.6 billion as the world's largest publicly traded hedge-fund manager. "If we do get a vote for Brexit, it's the second and third-order effects which are much more interesting from an investment point of view." First, though, there is the vote. And with many hedge funds nursing wounds from the worst start to a year since 2008, some managers are taking money off the table as they fear bets could go terribly wrong. When the Swiss franc was devalued in January 2015, the US$830 million Everest Capital Global fund was wiped out, and Comac Capital, which managed US$1.2 billion, had to return money to clients.

The US$2.9 trillion hedge fund industry is under fire from institutions and investors as many funds have failed to protect clients from volatility. More funds shut than started in the first three months of the year, the second consecutive quarter that closings exceeded openings, according to data published by Hedge Fund Research Inc.

The Chicago Board Options Exchange Volatility Index has climbed about 21 percent this month. The pound fell to a more than two-month low against the dollar last week after opinion polls put the "Leave" campaign ahead. It recovered more than 2 per cent yesterday after a weekend poll put "Remain" in the lead. Axa SA chief executive officer Henri de Castries said last week that there's an "extremely high" probability the UK will vote to leave the EU. BLOOMBERG