Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Hedge fund managers won't admit it, but they live for the quarter. While some of the bigger firms update clients more often, regular outfits provide an update four times a year, after which investors often decide to redeem their holdings or leave things as is.

So it couldn't be more unfortunate that Brexit happened just five trading days before the end of the second quarter. Even the savviest of money managers would struggle to recoup the kind of losses seen over the past two sessions. And a smaller gain, or a negative return, could spur outflows from an industry already under fire.

Hedge funds globally saw a net $15 billion exit from January to March, reducing assets under management to $2.86 trillion from $2.9 trillion, Chicago-based Hedge Fund Research said in April. In Asia, investors redeemed $2.9 billion in the first quarter, the most in seven years, data from eVestment show. That was after big outflows in 2015 as well. Given the massive jolt that just happened, chances are there will be another round of investment calls.

Wouldn't You Know
After a rough first quarter, hedge funds had started to recover when Brexit hit. The final point on this chart is June 24
Source: Hedge Fund Research; Bloomberg

For the broader market, that could extend Brexit pain a little longer. Investors should watch for liquid assets that hedge funds may sell to meet redemptions in July and August. The rocky start to 2016 has already spurred record sales of U.S. Treasuries by Caribbean-domiciled investors, who are often seen as a proxy for hedge funds and other leveraged accounts. Gold, or highly liquid corporate bonds, could also lose ground because they're easy to sell.

Unlikely Downhill Partner
In late 2008, gold dropped with stocks, reversing its traditional inverse correlation with risky assets as hedge funds sold to meet a wave of redemptions
Source: Bloomberg
* Values indexed to July 21, 2008 for comparability.

It's true that some winners are emerging, and as usual, when it comes to hedge funds, they're quick to trumpet any success. But outside of machines and a handful of contrarians who picked a Brexit vote, most money managers will have to wear the shock referendum's poor timing.

Had the polling happened on July 1, it would have been a whole other story, giving firms at least a couple of months to recover before having to fess up to investors. If David Cameron wanted a referendum so bad, he could at least have made the timing better.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net