The market is taking divided positions in the run up to the EU referendum

Date: 26 May 2016

Bumblebee Design

Mike Fullalove, head of fund products at Barclays Wealth, says that currency is playing an important part in all investment strategies.


Is Brexit a threat or an opportunity for hedge funds? 

The majority of managers we have been speaking to are seeing Brexit as an opportunity to trade through it. Political events usually translate to asset price volatility, which is a good for hedge fund strategies in general. Given the campaign is not new news to the market place, many asset prices have already adjusted with some discounting the probability of an exit while some continuing to price in a non-event style outcome. Managers are taking two broad approaches to the upcoming referendum. One is taking advantage of the current volatility, be it through plain vanilla instruments or derivatives to use currencies, in particular Cable which is a foreign exchange term used for GBP/USD. There are also a handful of European sovereign bond exposures long and short. The other, and more conservative approach, is from those maintaining a defensive portfolio and in some cases keeping a higher than average cash balance to take advantage of any potential fallout.

Give us your view of hedge fund performance? 

Hedge fund alpha, the measure of active return, has declined over the last decade for a number of reasons. Firstly, there’s greater industry competition and crowding so traditional hedge funds have become more mainstream plus traditional funds are migrating towards active strategies. This has resulted in too much money chasing the same opportunity set. Then, hedge fund fees have been too slow to adjust downwards to reflect the lower return environment. Finally, low interest rates and increased liquidity have resulted in the potential for easy funding for weaker companies or even economies with deteriorating fundamentals. This has been a primary headwind for hedge fund short selling strategies. 

What are your views on robo-investing?

It isn’t a 360 solution. While big data analytical tools can improve some strategies, other things like analysing a set of accounts, considering competitive factors and building valuation models are difficult to codify, although this may change in the future. We believe both quantitative and traditional approaches to investing can co-exist, with each carrying different benefits and risks.   

What trends do you see in the hedge funds sector? 

The growth of the Alternative UCITS has been a good trend. These are public limited companies that coordinate the distribution and management of unit trusts amongst countries within the European Union. They are growing both in terms of assets and number of new entrants to this space. We have seen higher quality propositions with the ability to mirror various liquid hedge fund strategies into an Alternative UCITS construct. With bond yields continuing to be depressed at historical lows,  and macro risks continuing to drive sentiment, many investors running traditional multi-asset portfolios want to run less market beta during periods of market and macro stresses. 

What do you think about fees?

We are generally supportive of managers charging incentive fees, given this aligns performance objectives between the manager and the investor. Some say that a fee should only be charged on performance over a specific hurdle or benchmark rate. 
Where fees have come under more pressure has been on the management fee side of the equation as this is what eats into the overall return. Higher management fees can also skew the manager’s focus away from a performance fee model which is in investor interest to an asset gathering approach which works to line the pockets of the manager and is something we are against. 


This article was published in Citywealth Weekly, our mid-week roundup of topical news and exclusive expert comments. Sign up here to start receiving the Weekly in your inbox.