In regards to London’s hedge-fund executives returned Monday to an industry bloodied but unbowed by Friday’s market turmoil.
There are Several traders in London’s Mayfair district went into Thursday’s referendum positioned for a rally in assets such as the pound and stocks and were caught out by the U.K.’s shock vote to leave the European Union.
“It was Armageddon” in the markets, said Lisa Scott-Smith, currency team manager at London-based Millennium Global Investments Ltd., a $15 billion currency manager, who said her fund was able to make a small profit and small earning.
However, industry insiders say many traders also appear to have learned their lessons from previous market shocks, such as the European Central Bank’s underwhelming stimulus last December or the Swiss Central Bank’s removal of its currency ceiling last January. Anecdotal evidence ahead of the vote suggests many had refrained from placing large bets on the binary outcome.
“Generally [the] damage seems contained,” said Anthony Lawler, portfolio manager at GAM Holding. The “risk is that some highly geared relative value managers will have been forced out of positions.”
He said macro traders and equity funds were among those suffering losses.
“A number of funds had reduced risk” in the run-up to Thursday’s vote, said Russell Barlow, head of hedge funds at Aberdeen Asset Management, which runs £292.8 billion in assets. He said that while funds were exposed to risk assets going into the vote, funds’ risk levels were still lower than at the start of the month.
Industry insiders say that fund performance for Friday is likely mostly to range between losses of around 3% and gains of up to 4%, although many funds haven’t yet reported to investors.
Equity hedge funds that bet on both rising and falling prices are likely to have lost roughly 1% to 2% on Friday, according to estimates by Lyxor Cross Asset Research. Performance from macro traders, who bet on moves in currency, stock and bond prices, is likely to have been between minus 2.5% and a 0.5% gain on the day.
Such losses are painful but unlikely to prove fatal to most funds. They also help paint hedge funds, whose lackluster performance has been criticized for years, in a better light compared with mutual funds and index trackers, which were hard hit as the STOXX Europe 50 and the DAX indexes dropped nearly 7%.
Some hedge-fund managers found themselves on the right side of Friday’s market moves, which saw the pound slump and equity markets tumble, and have chalked up gains.
Hedge fund Marshall Wace, whose founders Paul Marshall and Ian Wace backed opposing sides of the vote, had a 1.39% short in easyJet PLC, according to data from the U.K. regulator. The budget airliner warned Monday that the “Brexit” vote would hit third-quarter revenue. The shares are down more than 30% since Friday, with just under £2 billion wiped off the airliner’s market cap.
36 South Capital Advisors, which is based in London’s exclusive Berkeley Square and which trades options to try to profit from extreme market volatility, gained as much as 10% in its Kohinoor Core fund during the day as volatility rose.
Aaron Smith, founder of U.S.-based Pecora Capital, a global macro fund that trades a range of markets, had bought protection against a market selloff ahead of the referendum.
That included call options—the right to buy at a predetermined price—on the CBOE Volatility Index, or VIX, a measure of volatility often referred to as the market’s “fear gauge.” These options shot up in value by 75% in the wake of the vote.
Mr. Smith also started selling out of gold and bets against the oil price early Friday morning, with both positions proving profitable.
Computer-driven hedge funds were mostly positioned the right way. Many of these funds follow medium and long-term trends in markets and hadn’t been lulled into the recent rally in sterling ahead of the vote. Instead, many were betting against the pound and on falling bond yields, two trades that proved profitable as the result of the referendum emerged.
Netherlands-based Transtrend, which manages about $6 billion in assets, made more than $200 million in profits on the day. It gained at least 4% in its funds on Friday, with one of its funds gaining as much as 10% on the day.
Cantab Capital, based in Cambridge, England, gained more than 3% on Friday. Aspect Capital, which runs $6.3 billion in assets, gained around 3%, said a person who had seen the numbers. AQR’s Systematic Macro fund gained around 5%.
Robert Savage, who manages $100 million currency hedge fund CCtrack Solution, said the fund had a good day, following the slump in sterling.
“I don’t think this is over,” he added. “Central banks are going to intervene.”