The recent UK referendum, which resulted in the United Kingdom’s exit from the European Union, has rocked the financial world. The value of the pound plummeted to lows not seen in thirty years, exemplified by today’s valuation of the pound at $1.33, down from $1.48 immediately prior to the vote.
The initial reaction of global equity markets was universally negative. The DJIA fell more than 600 points. Gold and silver rose dramatically, oil dropped below $50 and the 10-year treasury yield declined sixteen basis points.
It is not unusual for a momentous event to trigger turmoil in the markets. History is replete with examples. What will be unusual is seeing these initial reactions persist.
It will be months, if not years, before the UK is has completely disengaged from formal membership in the European Union. More to the point, no one can foresee what the disengagement will look like in the wake of negotiations. This is wholly uncharted territory. The UK is the first member state to secede from the EU leaving us without a road-map to rely upon for direction on how this will play out.
The Impact on Hedge Funds
Hedge funds will deal with the Brexit in the same manner the industry has dealt with other impactful events. As has always been the case, some will deal with it better than others. It isn’t the Brexit that will cause some hedge funds to fail. Rather, it is the manner in which each fund elects to deal with the ramifications of the Brexit that will ultimately decide its fate.
Obviously, the strategies pursued by hedge funds will be a factor, with certain strategies being more vulnerable than others. For example, hedge funds pursuing strategies that have a low correlation to market benchmarks are likely to fare better than those funds with greater dependence on these benchmarks.
The Impact on Hedge Fund Jobs
The Brexit will almost certainly have an impact on London’s role as the center of Europe’s financial world. The UK is home to the second largest population of hedge fund firms behind the United States.
While it will take many months for the Brexit to unfold, it is almost certain that the influence of London as a financial center will suffer, at least in the short term. However, investors will soon recognize that the core of the U.S. economy is strong, causing U.S. markets to recover fairly quickly.
It is unlikely that any substantive staffing changes will be implemented by the hedge fund industry in the current environment. The uncertainty created by the Brexit has the potential to increase hedge fund redemptions and reallocations. Money will be shifted throughout the hedge fund industry. While this shift may create employment opportunities for some, it has the potential to foment job losses for others. However, only the passage of time will determine which hedge funds succeed and which will fail.
Be prepared to capitalize on these job opportunities by acquiring a copy of the 2016 Hedge Fund Compensation Report.