Scientist Turned Hedge-Fund Founder Lured to Pound, Euro Swingsby
Pakula to look for ‘themes around stress’ in Europe, the U.K.
AE Capital’s fund returns 7.5% this year, outpacing peers
AE Capital, a hedge fund run by a former atmospheric scientist, is seeking to take advantage of price swings in the pound and euro versus other currencies as the aftershocks of Brexit rumble across the globe.
Volatility in the pound will remain elevated in the coming months after the U.K. opted to quit the European Union last week, said Lyle Pakula, the fund’s Melbourne-based chief investment officer. There is also “more risk in the euro” as the outcome fuels populist and nationalist sentiment across Europe, he said.
“There’s certainly more volatility to come,” Pakula said in an interview by phone. “We’re going to be looking for themes around stress in Europe and in the U.K. that’s obviously coming.”
AE Capital made about 7.5 percent this year, according to the manager, outperforming the average 0.7 percent return of other hedge funds tracked by data provider Eurekahedge Pte. The fund, which uses computer algorithms to trade in financial markets, had trimmed its risk exposure in the pound and euro before the results of the U.K. referendum on Friday in anticipation of higher volatility, Pakula said. The manager had “manually intervened” to reduce the volatility in the fund on Thursday as the computer model wouldn’t be able to set the appropriate risk level, he said.
“The market was pretty sure it was going to be a ‘Remain’ vote,” Pakula said. “Now that they’ve been caught wrong-footed, one day is not enough time to adjust to that. Certainly there will be more action.”
Sterling slid by the most on record against the dollar on Friday to reach $1.3229, its weakest level since 1985. One-month implied volatility for the pound versus the dollar, a measure of price swings based on options, jumped to as high as 32.1 percent then, the most since Bloomberg started tracking the data in 1996.
The euro slid more than 4 percent to $1.0913, the weakest level since March 10. One-month implied volatility for the single currency against the greenback surged to as high as 16.3 percent, the most since the European credit crisis in 2011. The result in Britain has fanned speculation that more countries could withdraw from the EU and was a fillip to populists in France, Italy and the Netherlands. France’s Marine Le Pen called for an immediate referendum in her country.
“I’ll be watching the euro; it didn’t really take flight like the pound,” Pakula said. “If there’s another referendum in another country in Europe, that could be really bad.”
Pakula, who holds a PhD in atmospheric science from Colorado State University, set up AE Capital in 2011 with Jess Morecroft, the company’s chief technology officer. Their fund, which overseas about $120 million, returned 19.4 percent last year, according to its report to investors.
The manager, which also trades the yen, Aussie and kiwi, identifies major themes that drive markets based on fundamental research before deciding on its trades, which are then fully automated. While the fund holds its positions for an average of three to five days, it can sometimes hang on to them for as long as a month, Pakula said.
“We’re going to be looking at which asset classes are under duress due to this and how that’s going to play out,” Pakula said. “This will be a multi-year event.”