Brexit Winners Emerge in Hedge-Fund Community Amid Market Chaos

  • Odey, computer-driven hedge funds among those that gained
  • Tudor told clients June 15 they needed to plan for exit

Hours after Britain’s decision to leave the European Union sparked mayhem across global financial markets, a handful of prescient investors began to emerge as big winners.

Hedge fund manager Crispin Odey, an advocate of a British exit, gained more than 15 percent in his flagship fund on Friday, according to a person familiar with the situation. Several hedge funds that use computers to follow trends, including David Harding’s Winton Capital Management, also reported gains. Shares of a Canadian insurer that was betting on deflation rallied.

They were among the few -- or, at least, the known few -- who profited as the pound plunged to the lowest since 1985, global stocks tumbled and bonds and gold rallied. George Soros, the billionaire who forged his reputation by making a billion-dollar score in a 1992 bet that the U.K. would devalue the pound, had warned Britons days before the vote that they were underestimating the true cost of a Brexit and that the only winners would be speculative forces seeking to exploit such a decision.

Odey had conducted a private poll ahead of the decision showing the vote was much closer than financial markets expected. Another hedge fund manager, Paul Tudor Jones’s $11.6 billion Tudor Investment Corp., told investors last week that the chances of a U.K. exit from the EU were higher than betting odds suggested.

‘Need to Plan’

“We think the likelihood that a U.K. majority votes to leave the EU is far higher than current betting odds of 40 percent,” the firm, one of the oldest hedge fund managers, said in a June 15 letter. “This probability is sufficiently high that investors need to plan for the aftermath of such a vote.”

Odey’s $10.2 billion Odey Asset Management profited because of short positions the firm had in place since last year, said the person, who asked not to be identified because the information is private. The flagship fund, Odey European, had lost money before the vote, falling 25 percent in the first five-and-a-half months of the year.

It wasn’t clear on Friday whether Tudor had made money betting on a British leave vote. Most hedge funds will update their investors on performance after the markets are closed for the day or next week.

Odey, 57, didn’t immediately reply to a request for comment on his performance. Patrick Clifford, a spokesman for Greenwich, Connecticut-based Tudor, declined to comment.

Soros’s Bets

The British pound fell, while demand for haven assets from U.S. Treasuries to gold surged. The yen briefly strengthened past 100 per dollar for the first time since 2013. Treasury yields had their biggest drop in more than four years and gold rallied above $1,300 an ounce. European stocks bore the brunt of the carnage in equities, with the Stoxx 600 Index sliding 7 percent in its worst day since October 2008.

Soros warned in an op-ed published in the U.K.’s Guardian newspaper on Tuesday that the pound would fall by at least 15 percent and potentially more than 20 percent in case of a leave vote. He wrote that such a devaluation would be less benign than in 1992, when he put on his winning trade against the Bank of England, in part because there’s very little room to cut interest rates.

“Today, there are speculative forces in the markets much bigger and more powerful,” Soros wrote in the op-ed. “And they will be eager to exploit any miscalculations by the British government or British voters.”

Soros Fund Management, which oversees the wealth of George Soros and his family, had dialed back its U.S. stock investments in the first quarter, while adding gold and bets against equities. It’s unclear whether Soros changed positions since then, or made money on Friday.

Michael Vachon, a spokesman for Soros Fund Management, declined to comment on the firm’s performance.

Machines Win

Short of making a directional bet, hedge funds that employ computers to follow trends also did well. Aspect Capital’s flagship $797 million Diversified Fund was up almost 4 percent on the day as of mid-afternoon, the $2.5 billion Cantab Capital Partners Quantitative Fund rose more than 3 percent, and the $12.8 billion Winton Futures Fund gained about 2 percent, according to people with access to initial return estimates for the funds.

Spokesmen for Cantab, Winton and Aspect declined to comment.

“This is the winning strategy in this troubled environment,” said Philippe Ferreira, head of research at Lyxor Asset Management. “This is typically an environment conducive for hedge funds who can trade the higher volatility and outperform traditional markets.”

Anthony Lawler, a money manager at GAM Holding AG in London who tracks hedge-fund performance, said such funds were making money from their bets that U.S. Treasuries, European sovereign fixed income and the U.S. dollar would rise in value, while the energy sector and pound would face a sell-off.

Defensive Positions

Some managers had taken money off the table ahead of the referendum, but the industry overall failed to predict the Brexit outcome. A survey of money managers on Wednesday and Thursday by Drobny Global Advisors LP showed 90 percent of them were expecting voters to back staying in the trading bloc. Seventy-one percent of the respondents in another survey of 270 fund managers by hedge-fund tracker Preqin earlier this month said they expected Britons to remain in the EU.

There were limited telephone calls from clients of Credit Suisse Group AG’s prime brokerage unit and positioning was “light” ahead of the vote, the bank said. “Majority of funds were defensively positioned coming into last night’s vote as measured by gross exposure,” the bank said.

Computer-driven hedge funds profited because they had about 8 percent of their net asset values invested in bets that the pound would fall against the U.S. dollar, according to data from Lyxor. A further 12 percent was allocated on bets that the Japanese yen would gain.

Another of Odey’s firm’s funds, Absolute Return Focus, was up about 6 percent Friday, due to short positions in equities and long positions in the U.S. dollar and gold, according to e-mailed comments seen by Bloomberg.

Deflation Winner

London’s largest homebuilder, Berkeley Group Holdings Plc, closed down 21 percent on Friday, the biggest drop since 2004. Odey Asset Management and Marshall Wace held the two biggest short positions against the homebuilder, according to data from the U.K.’s Financial Conduct Authority.

Fairfax Financial Holdings Ltd., the insurance and investment company led by Canada’s Prem Watsa, advanced 3.6 percent. Watsa has highlighted bets on declining stocks and his contracts that guard against a decline in consumer prices.

“If you want one company that would be a huge winner from deflation in the U.K., EU and U.S., it would be Fairfax,” David Havens, a debt analyst at Imperial Capital, wrote in a note. “They have massive derivative bets geared to pay off in a major way for this black-swannish situation.”

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