By Tasha Voase, Alumnus of The Young Investment Banker Programme 2016
With the Brexit campaign rising to a peak ahead of the much-awaited EU referendum on the 23rd of July, large corporations are choosing sides left right and centre. With many investment banks such as Goldman Sachs and Citigroup backing the campaign to remain in the EU, the position of many Hedge Fund managers to back a Brexit is controversial and yet unsurprising.
Led by Crispin Odey (founding partner of Odey Asset Management) and Sir Michael Hintze (conservative party patron and founder of CQS) many people in Mayfair (including Helena Morissey, Newton) are supporting the split of Britain from the EU with both their words and, perhaps more importantly, with their money. Whilst Odey himself has dismissed the speculation that he and others are backing a Brexit for reasons of their own self-interests, there are clear reasons why a Brexit may favour those within the industry.
In the run up to the referendum, it is inevitable that there will be a period of stock market volatility and, should Britain elect to leave the EU, Morgan Stanley believes shares in the FTSE100 could underperform by as much as 20%. However, whilst s period of stock market volatility may seem bad to most of us, for the leading Hedge Fund’s this period could actually be highly profitable as it will enable them to ‘short’ stocks which could, if they are successful, be highly lucrative.
The EU is somewhat unpopular in Mayfair with many EU regulations, following the 2007 financial crisis, reducing their profits and it has been estimated that if these rules are lifted, the Hedge Funds will stand to save around $393 million. The series of laws passed by Brussels have, by and large, been unpopular in Mayfair, with the Alternative Investment Fund Managers Directive (which aimed to make the previously opaque industry more transparent as well as placing limits on individual salaries) increasing operating costs by an estimated 5% each year. In addition, many may be keen to avoid the Markets in Financial Instruments Directive II, which has been delayed for a year by the European Parliament, and may increase the price of doing business within hedge funds. Therefore, were a Brexit to mean that these regulations were lifted, the hedge fund industry would stand to profit enormously with it being estimated that hedge fund managers are set to earn up to an extra £250 million a year in the event of a Brexit.
However, whilst leaving the EU might mean that some of the regulations, such as the bonus rules introduced after 2007 in an attempt to stamp out ‘reckless’ trading, will be scrapped, it is unlikely that the industry will return to how it was pre-2007. For now though, there is plenty of pre-Brexit volatility in the market to be taken advantage of.