Sideways: Brexiteers’ financial gains may be short-lived
Traders claiming to have profited from the Brexit vote were slow to identify themselves in the wake of the historic decision for the UK to leave the European Union.
Some were no doubt reluctant to associate themselves with Brexiteering, or profiting from weakness in UK assets.
One dealer with no qualms about proclaiming his own prescience was hedge fund manager Crispin Odey, who reportedly made around £220 million from trades including short positions in property developer Berkeley Group, Lloyds Bank and ITV, juiced by some buying of gold and selling of sterling against the dollar.
This led to acclaim for Odey from sections of the UK press that were in favour of a split from the European Union.
The trading success of Odey, who was a public supporter of the campaign to leave the EU, should be put in context. Gains of around 15% in his flagship hedge fund after the Brexit result was announced on June 24 only served to reduce his losses for the year by around half.
Still, every £220 million counts, and Odey can put his Brexit trading alongside other sensible decisions he has made through the years, such as first marrying one of billionaire Rupert Murdoch’s daughters, and later marrying a member of one of the founding families of Barclays.
Reports of Odey’s Brexiteering exploits did not include a short position in Barclays, where he seems to have missed a trick, given that the bank saw an initial 30% price plunge in the wake of the vote.
Barclays was among many European banks to see further price falls and volatility in the week following the Brexit referendum, even after shares bounced from their early lows.
There are plenty of reasons to be gloomy about the banking sector in the wake of the vote, especially for a firm such as Barclays that remains an active player in investment banking and now faces a host of uncertainties over sales of financial products into Europe from its London base, as well as a worsened outlook for advisory, underwriting and trading services.
Shorting financial sector shares brings its own idiosyncratic risks, however.
The chief potential value trap lies in the reaction of policy makers to short selling of national champion banks. This became an issue in the credit crisis of 2008, when temporary short sale bans were implemented for financial stocks in many countries, including the US.
France, Spain and Italy imposed further bans in 2011 and 2012 during the European market crisis over a potential Grexit (remember that?) and there may be fresh action if there is a prolonged fall in bank share prices as the Brexit saga unfolds.
Evidence suggests that short sale bans have little mid-term impact on bank share prices, but the urge to respond in a crisis may prompt action from regulators concerned about a potential loss of confidence in the financial system.
Another potential threat to hedge funds looking to profit from lower bank stock prices could come in an extension of the European Central Bank programme of bond buying to include bank debt.
The ECB avoided including bank bonds in its recent expansion of debt purchases to corporate credit. But a move to buy bank bonds could overturn another longheld assumption about what is feasible for a central bank.
The ECB faces limitations on other forms of easing, such as rate cuts that take bond yields deeper below zero.
And a move to buy bank debt would avoid the effective closure of a section of the equity markets that comes with a temporary short stock sale ban. It could also have a powerful impact.
Any ECB buying would presumably be limited to bonds of banks in the eurozone, in line with the corporate credit programme that recently swung into action. But the approach of ECB buying created a powerful rally in credit spreads that included bonds from companies not eligible for purchases, and bank bond buying could have a similar effect on debt and also stock prices for financial firms, even ones that face being stranded in a post-Brexit UK.
Crispin Odey and his fellow Brexiteers could accordingly be forced to look elsewhere for further profits from the vote.