No 'big short' yet for hedge funds on Brexit

Thu Mar 3, 2016 1:43am EST
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By Jemima Kelly and Patrick Graham

LONDON (Reuters) - Hedge funds, whose speculating contributed to the pound's devaluation in 1992, have yet to make major bets on Britain leaving the European Union because few expect it to happen and most doubt a big payout from market moves around the June vote.

Asset managers and hedge fund desks at major banks contacted by Reuters said "tail risk" funds which bet on major financial events such as the euro zone's debt crisis or the global credit crash think the risk of a pound meltdown is just too small.

And many of the shorter-term day-to-day speculators appear to have missed the bulk of this year's 9 percent drop and do not see a 'big short' on the pound as worth the risk, they said.

"It's not a high-quality exposure to have on," said GAM portfolio manager Anthony Lawler in London, who invests about $25 billion in hedge funds. "People don't think Brexit will happen, first of all, and now the price of sterling has fallen and the price of an implied volatility option is high."

Most bookmakers - watched more closely than opinion polls in financial markets after calling a series of major political events in the past decade more accurately - show only a 1 in 3 chance of a British vote to leave the EU on June 23.

But even if that does happen, hedge fund managers say the uncertainty over the aftermath is too high to make a large "short" sterling position - a bet that the currency will fall - in the run-up or immediately after the vote an attractive play.

Some even reckon the euro currency may fare worse over the long term if Britons vote to leave the wider 28-nation EU bloc.

"The big funds have been fairly uninvolved in the Brexit trade," said the European head of hedge fund sales at one of the top 10 currency trading bank.   Continued...

The Britain's Union Jack flag flutters next to the EU flag at the opening ceremony of the Commonwealth Heads of Government Meeting (CHOGM) in Valletta, Malta November 27, 2015. REUTERS/Toby Melville