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Brexit preparations – to hedge or not to hedge?

Fund flows for May that were published by Lipper and Morningstar earlier this week show strong outflows from equities and money pouring into money market funds, a trend which is likely to have continued this month. Expert Investor made a quick tour around Europe to check how fund buyers across the eurozone have prepared for the British EU referendum, and it seems most indeed have a lot of cash these days, even though most believe Remain is the most likely outcome of the vote.

Frank Reisbøl, managing director at Banque Carnegie Luxembourg, is better safe than sorry. “We have raised the cash levels of our clients’ portfolios over the past three or four weeks to an average of 40%,” he says. “For us, it’s completely uncertain whether Brexit is going to happen or not, and if you deal with private clients it’s always better to play it safe.”  

Alvaro Martín Sauto, head of funds-of-funds at Bankia in Madrid, had until recently been avoiding risky assets because of Brexit fears. “We doubled cash levels in our funds-of-funds to 10 to 13%, and sold Eurostoxx 50 futures and bought some put options to neutralise our equity exposure,” he says.

However, as markets nosedived last week, he decided to close some of these positions. “In fact, our main risk is on the Remain side,” says Martín Sauto. “This is our base case, but we have very low exposure to risky assets [which are likely to rally after an ‘In’ vote]. So we added some Eurostoxx 50 futures yesterday. On Friday, it will be difficult to do something because there will be a lot of volatility. So we’ve had to put our bets in place before the vote.”

Keep calm and carry on

The Brexit referendum hasn’t plunged every European fund buyers into feverish trading, however. Jaap Bouma, a senior portfolio manager at Dutch wealth manager Optimix, simply doesn’t believe Brexit is a possibility. “We trust the bookmakers and presume doubters will choose ‘Remain’ in the end. People tend not to like change and uncertainty,” he says.  

Tim Peeters, head of securities portfolios at the Belgian multi-family office Portolani, can’t be too bothered by the Brexit question either, even though some of his clients do. “Some of them are really panicking, to an extent I didn’t even see during the eurocrisis,” he says in slight astonishment.

“Our asset allocation simply isn’t really a function of Brexit,” he says. Perma-bear Peeters has had a high allocation to dollar cash and absolute return funds, two areas that should offer protection in the case of Brexit, for much of the past two years. And one of few asset classes he is overweight in, commodities, is not likely to be affected by the vote anyway.

“Overall, our portfolios are well-positioned to prevent a fall into the abyss,” Peeters concludes. 

Part of the Bonhill Group.