How Brexit and Covid-19 mixed to hit UK hedge funds

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In early 2016 billionaire scientist David Harding opened a San Francisco workplace for his booming London hedge fund Winton Group. It was seen as a daring step by the agency — which on the time managed $34bn in consumer belongings — to maneuver into the world’s expertise heartland. The corporate, competing with US tech giants similar to Google and Fb for proficient workers, hoped to faucet into the Bay Space’s enormous pool of coders and innovation.

The transfer was symbolic of the UK agency’s world ambitions following phenomenal progress within the years after the credit score disaster but additionally of the energy of the business in London, with most of the star performers primarily based within the upmarket Mayfair district. In 2015, six out of the world’s 10 greatest hedge funds have been listed as basing their cash administration wholly or collectively out of the UK. Winton was 10th largest on the HFM International Billion Greenback Membership listing.

5 years later, that quantity has shrunk to a few. Winton has closed its California operation and decreased its presence in New York. Poor efficiency, notably in the course of the coronavirus pandemic, and a controversial choice by Mr Harding to maneuver away from a mode of investing he pioneered within the 1980s have weighed on the agency, whose belongings have lately tumbled to round $12bn. Employees numbers have been lower. And at the beginning of this 12 months Winton ranked 23rd and is prone to have fallen additional after latest losses.

It isn’t alone. Quite a few London’s greatest hedge fund corporations, together with CQS and Lansdowne Companions, have suffered massive losses this 12 months. Dissatisfaction with lacklustre efficiency within the $3.2tn business — which makes use of bets on rising and falling costs throughout markets and which as soon as appeared to supply the promise of income in any setting — has led to greater than $120bn of consumer outflows globally because the begin of 2018, in keeping with information group HFR. Investor curiosity has moved on from hedge funds to fast-growing US expertise shares and the non-public fairness and debt sectors.

As progress within the once-booming business has stalled, London has appeared uncovered. New York, Connecticut and the broader North American hedge fund sector have been higher in a position to face up to the downturn than managers within the UK, holding on to belongings and delivering larger returns.

The share of worldwide hedge fund belongings run by UK-based managers has shrunk from 14.9 per cent on the finish of 2015 to 12.6 per cent at the beginning of the coronavirus disaster, in keeping with HFR. The US’s share dipped barely, from 77.2 per cent to 76.9 per cent, with Canada and France each selecting up new enterprise. US-based managers made a mean return of 56 per cent between January 2012 and July 2020, in keeping with funding agency Aurum Fund Administration, whereas UK-based managers made 40 per cent.

David Harding says the UK is ‘slightly little brother to the US’
David Harding says the UK is ‘barely little brother to the US’ © Jason Alden/Bloomberg
Michael Hintze’s CQS, known as one of Europe’s best credit traders, was caught out in this year’s market slump
Michael Hintze’s CQS, often called one in all Europe’s finest credit score merchants, was caught out on this 12 months’s market droop © David Paul Morris/Bloomberg

“The very best corporations by and huge are in New York and at all times have been,” says Winton’s Mr Harding. “The UK is barely little brother to the US.”

Now the disproportionate affect of the coronavirus disaster on the London sector, which employs hundreds, and uncertainty over the long run buying and selling relationship with the EU threaten to additional harm the UK capital’s prospects, say business observers. As soon as the Brexit transition interval involves an finish in December, UK corporations may lose some advertising and marketing privileges to EU-based purchasers and will ultimately additionally face harder guidelines in the event that they wish to run EU-based funds.

“The US dominates the hedge fund business. It’s been trending in that path for fairly a while,” says Troy Gayeski, co-chief funding officer at New York-based SkyBridge Capital, which invests in hedge funds. “This has solely been amplified by the pandemic. The US has the expansion engines.”

American increase

Main amongst these is the US inventory market, which is extra prone to be traded by US-based hedge fund managers than their European rivals, and has dramatically outpaced European indices this 12 months, persevering with a long-running pattern. The S&P 500 index has soared to report highs this summer time and regardless of latest falls continues to be up 3.four per cent this 12 months, whereas the Nasdaq has climbed 21 per cent. In distinction, the Stoxx Europe 600 is down 6.four per cent and the FTSE 100 is down 20.2 per cent, in greenback phrases.

A few of the hedge fund winners by this 12 months’s market turmoil have been enormous funds headquartered within the US, albeit with some London operations. Whereas US managers similar to Bridgewater Associates and Renaissance haven’t been immune from market falls, Elliott Administration, Millennium Administration and Citadel are amongst these to have come by the disaster largely unscathed and made cash by chopping threat ranges, and benefiting from market dislocations, in keeping with traders.

Chart of estimated industry assets under management, by firm location (Q1 2020, %) showing America is the master of the hedge fund universe

Journey restrictions in the course of the pandemic aren’t serving to UK managers both. For the reason that discovery of Bernard Madoff’s large Ponzi scheme in 2008, many traders have insisted upon assembly their cash managers head to head and doing in depth on-site due diligence earlier than investing. Now, with coronavirus making that tougher, coupled with higher efficiency from US managers, some massive American establishments are preferring to speculate with easier-to-access home corporations and are eschewing European funds.

“There’s simply a lot [investor] capital within the US,” which advantages the US hedge fund managers on their doorstep, says one London-based government who has lately left the business and moved into the tech sector in pursuit of higher progress and profitability. “No matter Japanese and European traders have simply pales into comparability with the US.”

Traders, some wearing face masks, on the floor of the New York Stock Exchange in March
Merchants, some sporting face masks, on the ground of the New York Inventory Alternate in March © Spencer Platt/Getty

European drawback

Impasse within the talks over the form of the UK’s future buying and selling relationship with the EU threatens to additional harm the business, say authorized consultants. Because it stands, from subsequent 12 months UK-based managers face limitations advertising and marketing some fund administration providers to EU-based purchasers.

A crucial situation for the London business is the system of “delegation” — the extent to which an EU-based agency can delegate the administration of a fund to a UK-based supervisor. Such preparations are profitable for a lot of London managers, who use corporations in nations similar to Luxembourg or Eire with little in the best way of merchants or threat managers to delegate again to the UK, the place the fund managers sit. Nonetheless, the European Securities and Markets Authority, the EU regulator, in August wrote to the European Fee to advocate a tightening of the principles, which may imply UK corporations having to maneuver extra funding professionals to mainland Europe.

“We’re at a crunch level,” says Leonard Ng, a companion at legislation agency Sidley Austin, who advises on UK and EU regulatory points. “This might be a interval of stress for the asset administration business.

“Delegation . . . is about shifting the centre of exercise away from the UK into the EU,” provides Mr Ng, who predicts a “splintering” round Europe of the experience that’s at present centred in London. A dilution of that experience in London threatens jobs and tax revenues within the UK.

Whereas some high-profile executives within the UK business — together with Crispin Odey and Paul Marshall — backed an exit from the bloc, others at the moment are what it means for his or her enterprise and whether or not they should relocate.

A number of London’s biggest hedge fund firms have suffered big losses this year
Quite a few London’s greatest hedge fund corporations have suffered massive losses this 12 months © Hannah McKay/Reuters

London-based H2O Asset Administration, which manages €21.7bn in belongings and which was co-founded by former Crédit Agricole star fund supervisor Bruno Crastes, opened an workplace in Paris final 12 months as a hedge in opposition to Brexit and is contemplating relocating fund managers there, says an individual acquainted with the agency. Mr Crastes modified his residency from the UK to Monaco in 2017, the 12 months after the UK’s Brexit referendum vote, in keeping with regulatory filings.

Final 12 months former GLG star dealer Greg Coffey, one in all Europe’s best-known hedge fund managers, moved his hedge fund agency Kirkoswald Capital to New York over issues about London’s function as a monetary centre. 

Whereas few consider London will stop to be a hub for hedge funds, an ebbing away of the business places additional stress on its place in world finance. As lately as March 2018, London was ranked because the world’s prime monetary centre, in keeping with Z/Yen’s International Monetary Centres index. It has subsequently slipped into second place, behind New York. And within the consultancy’s most up-to-date survey, in March, London suffered the second-biggest fall of any of its prime 40 rivals within the rating used to find out its rating. It now sits solely marginally above third-placed Tokyo.

“Brexit has harm [hedge fund managers]. Rather a lot are French or Italian,” says one former London-based supervisor now positioned in continental Europe. “That’s scared them, they don’t really feel they’re welcome.”

A ‘golden age’

The upmarket London district of Mayfair — as soon as an space of muddy fields earlier than King James II gave permission in 1686 for an annual truthful to happen in Could — has lengthy been synonymous with the UK hedge fund business. Merchants relocated from the Metropolis of London within the 1990s and early 2000s to be close to the realm’s non-public banks and their ultra-wealthy purchasers, exchanging buying and selling concepts and gossip in fashionable hang-outs similar to The Wolseley on Piccadilly and The Arts Membership on Dover Avenue.

The arrival of excessive finance, an inflow of ultra-luxury retail boutiques and hovering workplace rents modified the character of the neighbourhood. Funds similar to Lansdowne Companions, primarily based simply off Berkeley Sq., and GLG Companions, which paid then-record rents for area on Curzon Avenue, grew to be among the many world business’s greatest names.

Not all London funds are struggling. Man Group manages $108bn and has relocated GLG’s traders from Mayfair to the City of London
Not all London funds are struggling. Man Group manages $108bn and has relocated GLG’s merchants from Mayfair to the Metropolis of London © Simon Dawson/Bloomberg

That progress was helped by the introduction of the euro in 1999, which supplied arbitrage alternatives that funds may commerce, and a wealth of tech shares to wager in opposition to within the dotcom bubble of the opening years of the 2000s.

“When the euro got here in, hedge funds completely nailed it [the trading opportunity],” says Rick Sopher, chief government of funding agency Edmond de Rothschild Capital Holdings. “It was the golden age of European hedge funds.”

However most of the buying and selling alternatives that made European merchants wealthy have since shifted to the opposite aspect of the Atlantic, notably because the US tech sector has grown. “[European hedge funds] needed to search for progress corporations, and the businesses on their doorstep weren’t rising that a lot,” provides Mr Sopher.

Some who know Mayfair and its hedge fund occupants nicely see indicators of change. Laurence Davis, proprietor of Mayfair establishment Sautter Cigars on Mount Avenue expects extra of his loyal hedge fund clients to maneuver out of the UK. He has already seen some managers go away, he says, however not but “within the enormous numbers which may occur. We haven’t felt Brexit when it comes to hedge funds in central London [yet]”.

A placard near anti-Brexit protesters outside the Houses of Parliament in London in July. The transition period comes to an end in December
A placard close to anti-Brexit protesters outdoors the Homes of Parliament in London in July. The transition interval involves an finish in December © Simon Dawson/Bloomberg
The upmarket London district of Mayfair has long been synonymous with the UK hedge fund industry
The upmarket London district of Mayfair has lengthy been synonymous with the UK hedge fund business © A.P.S./Alamy

Whereas the affect on the bottom is clouded by the results of coronavirus and the expansion of sectors similar to non-public fairness, the fortunes of a lot of big-name corporations have waned.

Lansdowne Companions was as soon as seen because the gold commonplace in fairness investing. However it wrote to traders at the beginning of the 12 months to explain a “disappointing” 2019 wherein its principal fund had made simply over 1 per cent whereas fairness markets had soared, in keeping with a letter seen by the Monetary Instances. The funding group has been additional caught out this 12 months, by massive bets on airline shares and on a restoration within the UK. Through the summer time, it shut its flagship hedge fund, which is down 22 per cent this 12 months.

Shut by on Trafalgar Sq., Michael Hintze’s CQS, often called one in all Europe’s finest credit score merchants, was caught out on this 12 months’s market droop. A fund that he personally manages, which had one of many sector’s finest information together with positive aspects of greater than 30 per cent in 2012 and 2016, misplaced round $1.4bn out there turmoil, thanks largely to dangerous bets on structured credit score.

Corporations similar to GLG, now a part of Man Group, GAM and Odey have additionally confronted their very own struggles since their heydays. The worth of GLG has been written down by greater than $1bn because it was purchased by Man, GAM suffered a scandal involving a star fund supervisor that price it billions of euros in belongings, whereas Odey’s belongings have additionally fallen.

Winton’s Mr Harding says the efficiency of his fund, which is down round 17 per cent this 12 months, has been “very, very disappointing”. Nonetheless, he provides that doesn’t imply the fund is damaged and he doesn’t remorse his choice to alter buying and selling technique away from trend-following. “I’m quietly assured in the long term,” he provides.

Not all London funds are struggling. Man Group manages $108bn and has relocated GLG’s merchants from Mayfair to the Metropolis of London. Whereas Marshall Wace, primarily based a brief distance from Mayfair close to Sloane Sq., has $45bn in belongings. Each have grown strongly in recent times.

But some within the sector see the London business’s struggles as a part of wider issues.

“At one level London had an actual shot at doubtlessly surpassing New York because the monetary hub of the world,” says Mr Gayeski. “However the eurozone disaster and Brexit [changed that].”

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