Brexit: Will it be a 'goldmine' for hedge funds?
INTERNATIONAL – Phillip Hammond is officially “outside the tent”, to use Lyndon Johnson’s phrase. After losing his job as UK Chancellor of the Exchequer and then his badge as a Conservative MP by rebelling against Boris Johnson’s hardball Brexit strategy, Hammond has kicked up an almighty stink by accusing Johnson of being in thrall to wealthy financial “speculators” who would actively profit from a no-deal Brexit.
Downing Street called it “an ugly smear”, Brexit-supporting hedge fund founder Crispin Odey called it “crap”, and Jeremy Corbyn’s opposition Labour Party seized on it gleefully as supportive of its own view: that the more chaotic and painful Brexit is for the UK economy, the bigger the “goldmine” for hedge funds.
Is there any truth in the accusation? Well, as a fresh exposé of hedge funds’ portfolio positioning and how that might “wag the dog” of the UK’s current Brexit strategy, its value is pretty much nil.
Are there investors out there betting against the pound, or UK stocks? Absolutely. Data from the Commodity Futures Trading Commission show the entire market is still underweight sterling. But much of this looks like rational positioning given Britain’s political chaos.
Bank of America-Merrill Lynch’s survey of global fund manager sentiment on UK stocks was already negative in June, before Johnson’s ascension as prime minister.
Some short positions are actually being trimmed: BlueBay Asset Management, by no means a hive of Brexit lovers, closed its own negative bet in August after three years. Hedge funds really do hedge their bets to make money.
Still, it’s easy to see why some might be singled out by Hammond and others. Odey, who gave £10 000 (R186 350) to Johnson’s Tory leadership campaign earlier this year, grumbles that he has been made to look “unpatriotic” and uncaring about what happens to the country.
Yet this is the same man who was filmed saying “the morning has gold in its mouth” after pocketing £220 million on a market slump the day after the Brexit vote.
While Odey’s no mastermind – his flagship fund was down nearly 50 percent in 2016 and is down 14 percent so far this year – he has profited from the mess.
But it is too limited to see this as being all about hedge funds cashing in by shorting the pound.
The potential gains from a no-deal Brexit are much bigger and more permanent than short- term trades. There is the regulatory bonfire that the Mayfair crowd are so excited about: Odey and dozens of other City investors called for a slashing of red tape and divergence from EU standards in 2016.
That is now within sight.
Then there is the low-tax economy promised by Johnson and others in a no-deal scenario. Howard Shore of Shore Capital wrote recently that corporate tax cuts combined with more tax breaks would make the UK more “business-friendly” than Ireland.
And finally there is the weak pound, loved by many wealthy entrepreneurs (not just hedge funds). Chris Rea, the boss of sealmaker AESSeal who recently gave £50 000 to the Conservatives, said back in 2017 that sterling’s depreciation would offset any pain from a hard Brexit. More than 80 percent of his customers are abroad.
Yet it is clear that most ordinary Brits would not benefit.
The Bank of England warns that a rise in unemployment and consumer prices will be the bigger concern for most people.
So while it is easy to counter the idea of an orchestrated hedge fund heist, it is hard to dismiss the idea of the industry embracing a no-deal Brexit. The Conservative donor base has hollowed out since the 2016 referendum.