The EU referendum was such a huge market-mover, resulting in record lows for the British pound and sharp losses for European equities. Of course these volatile moves are the bread and butter of short-term traders who may have jumped on the opportunity to make quick profits.
Most financial institutions have taken a defensive stance, however, perhaps still reeling from the aftermath of the “Black Swan” event of last year, which was the surprise decision of the Swiss National Bank to scrap its EURCHF peg while simultaneously lowering deposit rates deeper into negative territory. At that time, several firms and brokers lost money, leading some to declare bankruptcy and close shop altogether.
Still, the Brexit decision proved that fortune favours the bold, as a number of market players were able to cash in on the results of the EU referendum. Here’s a rundown of those who profited:
Forex traders and brokers
Most brokers decided to implement additional risk controls ahead of the EU referendum, anticipating large price swings and potential margin calls for its clients. To avoid another round of negative account balances, some brokers restricted trading for pound and euro pairs, as well as European equity indices and commodities denominated in European currencies. Most increased margin requirements or lowered leverage ahead of the event and again during the day of the referendum.
Still, some brokers reported record gains in client signups during the week of the referendum, as new customers wanted to take advantage of the large market moves then.
Of course forex traders who were able to see the Brexit coming were also able to make big wins on the announcement, as GBPUSD and GBPJPY were trading around key resistance levels by then. Cable plummeted by more than 1,500 pips on Friday while Guppy dropped by 2,500 pips.
Interestingly enough, reports have shown that robots were able to profit from this event more than their human counterparts, possibly because traders were hesitant to take risks on another potential “Black Swan” event. According to an article on the Wall Street Journal, this may have also been due to the fact that traders bet on the outcome they preferred.
For instance, model-driven investment firm Fort LP saw gains from holding assets like the Japanese yen and government bonds because their trading model highlighted global economic concerns. Even as its co-founder Yves Balcer expected the UK to stay in the EU, his firm’s trading model proved to be correct and the firm’s portfolios were up more than 3% on June 24.
NuWave Matrix Fund, whose trades are based on historical market patterns, recorded a 12% gain on Friday. Other funds which thrive on market volatility such as Quadratic Capital Management, which employs a strategy in the options market, made money during the market chaos because option prices increase in tandem with volatility.
For most algorithms, market sentiment isn’t taken into account as the strategies focus mostly on price action. A fund category for commodity trading advisors or CTA didn’t factor in the upcoming British polls, continuing to place its usual bets on futures and other derivatives based on market movements. These trading models saw a shift in favour of government bonds, gold, and safe-haven currencies, also proving to be profitable during the Brexit decision. Among the big gainers in this sector are Societe Generale’s CTA Index, AQR Capital Management LLC, and Fort and Welton Investment Partners LLC.
Apart from hedge funds that benefitted from the correct prediction of trading algorithms, there were also a number of portfolios that profited from watching the pre-referendum polls. For instance, the $1.5 billion fund of James Hanbury made a huge bet against the British pound even as some surveys suggested a tight race between the “Leave” and “Remain” camps.
This fund even commissioned its own poll just before the actual referendum, which suggested a victory for the “Remain” camp. For Hanbury, this suggested that the British pound couldn’t rally much further if the UK decides to stay in the EU but that it was facing significant downside if it exits. With this asymmetrical trade opportunity, Hanbury started buying investments that went against the British pound, eventually scoring $150 million in profits on June 24 and the following Monday.
Other funds that profited from the Brexit include Crispin Odey’s London-based fund which rebounded by 15% during the announcement of the results, even after being down for most of the year. In their case, they had a portfolio of short positions on British firms, such as Aberdeen and Berkeley Group, along with a large investment in gold. Atlantic Investment Management also raked in the cash with its bet on the US dollar against the British pound, which fell to its lowest level since 1985.
Even so, the number of hedge funds who reported big profits during the Brexit seems limited, as data firm Preqin polled that four out of five hedge funds expected Britain to stay in the EU. For many, it was all about limiting risk or hedging positions, closing those that could continue to lose ground now that a decision to exit the EU has been made while retaining those that could see further profit.
But while most of the big market moves have passed and are unlikely to be repeated in the near future, there are still plenty of trading opportunities left for the rest of the year. For some, the euro and European equities stand to lose further ground as the Brexit may also have repercussions on what’s left of the region, possibly even resulting to individual referendums.
In addition, central banks are expected to make adjustments to their monetary policies to account for uncertainties in the global economy, paving the way for strong trends in the currency market. So far, equities are showing resilience but others think that these merely provide opportunities to sell on rallies. Either way, we’re just halfway into the year and there’s no shortage of chances to make big profits!