Credit Options Give Brexit Hedge for Cairn Capital as U.K. Votes

Cairn Capital Ltd. said it bought options contracts on credit derivatives indexes to hedge the risk that the U.K. will vote to leave the European Union.

Options, which give investors the right but not the obligation to buy or sell at a fixed price, may offer cheaper insurance than the indexes themselves, according to the London-based asset manager, which oversees about $9.2 billion. Cairn bought July contracts giving it the option to buy protection on European high-yield, investment-grade and financial derivatives benchmarks at higher levels than they’re currently trading.

Britain began voting Thursday on whether to remain a member of the EU or split from the 28-nation bloc, and earlier polling suggested the vote is finely balanced between the two camps. Options provide protection against a jump in debt risk at little or no cost, albeit by sacrificing the potentially higher profits of buying swaps directly, while losing less money if debt risk drops.

“Options are a nice way of expressing a view when the outcome is binary,” said Andrew Jackson, chief investment officer at Cairn Capital in London. “There’s unlimited upside versus a small, known downside in options.”

The amount of outstanding credit index options rose to $94 billion on June 17 from $80 billion a month earlier, according to data from the Depository Trust & Clearing Corp.

Jackson reduced holdings in some sterling-denominated bonds, including high-yield notes and securities backed by non-conforming U.K. mortgages, in March and April in preparation for the referendum, he said.

“We’re happy with the bonds we hold and we’re just using hedges to fine-tune our exposure,” he said. “Most investors will lose money in the short term if we vote to leave, in part because credit markets fear uncertainty. If we remain, most investors are likely to make money.”

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