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Some of the world’s biggest hedge funds and asset managers are anticipating large trading opportunities in the immediate hours after the UK’s vote on its EU membership, and their traders have stockpiled cash to take advantage of any market dislocation.
As the UK voters head to the polls, traders and money managers said they had been unwilling to make large wagers ahead of the result but were preparing to jump into the market afterwards.
“The best is to go into the event with as few positions as you can, so you can take advantage of the volatility that comes afterwards,” said Stan Busquet de Caumont, a macro portfolio manager at Point72 Asset Management, Steven Cohen’s family office. “To come into it with too many positions, you will be just fighting off fires and you won’t be able to concentrate on the opportunities.”
Global investors have more of their portfolios allocated to cash than at any time since 2001, according to a survey by Bank of America Merrill Lynch that underlines how market moves could be sharp if those funds are put to work.
However, even if traders want to make a big bet, dealers and investors may be unwilling to take the other side, some said. Goldman Sachs became the latest bank to warn that turbulent conditions in the currency market in the wake of the result could make pricing difficult.
The vote may “result in the foreign exchange market experiencing high volatility with the potential to create material gaps in liquidity and wide swings in market prices,” according to an email from Goldman Sachs seen by the Financial Times.
Banks and foreign-exchange trading venues have called in extra staff to cope with potential heavy volume.
“Pretty much everything is on hold,” said Marc Lasry, chief executive of Avenue Capital, an $11.3bn alternative asset manager. “You’re trying to buy things cheap in the hope that people are very nervous.”
Another hedge fund manager said he had spent the past few weeks trying to work out which relationships between various asset classes would change in the event of a Brexit vote. “Correlations may break down completely, and it is hard to know how the market will react,” he said.
Mr Busquet de Caumont said that if the UK chose to stay in the EU, liquidity would probably return and “the whole game will be about selling protection”, with bets on sovereign debt as well as wagers on volatility in currencies.
"To come into it with too many positions, you will be just fighting off fires and you won’t be able to concentrate on the opportunities"
- Stan Busquet de Caumont
But if the decision is to leave the EU, markets will probably stay frozen “as people figure out what it means”. Then “you will have a cascade of consequences” as political movements in other European countries gather momentum for similar decisions, he said.
Some managers with retail clients, such as Pimco and Vanguard, had hedged by moving into bonds, traders said. For them, it is easier to justify losing some money on a hedge than to explain that they did nothing at all, one trader pointed out.
Strategists at OppenheimerFunds said they had set aside cash and cash-equivalent securities ahead of the referendum. Though they expect the UK to remain in the EU, they have shifted from the debt of domestically focused UK banks to those with a global focus, and have added risk in options strategies in currencies. They are also eyeing rates in emerging markets including Poland and Hungary.
Bets on sterling’s rise are almost perfectly balanced with wagers against, according to futures data from the CFTC as of June 14.
Judith Posnikoff, founding partner at Pacific Alternative Asset Management, said investors were seeing “things really slow down in terms of trading while people just wait — and then there will be a flurry of activity once it becomes clear which way it goes”
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