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Brexit – both a political and financial crisis?

The unexpected referendum result could generate opportunities for a number of hedge-fund strategies.

“To boldly go where no man has gone before.” Once it was the catchphrase of the Starship Enterprise. Now it also appears to be the mission statement of a slender majority of the British electorate. In theory, the journey should take two years. Given the roughly 40,000 pieces of legislation which govern the United Kingdom’s relationship with its largest trading partners, it looks more like a five-year odyssey deep into the unknown.

In the meantime, the uncertainty thrown up by the unexpected result and the ensuing negotiation process could generate opportunities for a number of hedge-fund strategies. So, what are the longer-term implications, now that the initial panic has subsided? To help us formulate these updated views, let us remind ourselves of the operating environment. We reinforce our view that recent events should mean structurally higher volatility across the majority of asset classes. The U.S. dollar presumably benefits until there is more clarity on the future direction of the European Union (EU). Riskier assets across the board could be in for a rocky ride.

So which hedge-fund strategies appear best placed for the new reality that we find ourselves in? Those strategies which are most liquid and most capable of making money in uncertain times. This should clearly include discretionary macro, which has historically performed better in riskier markets, because managers are typically more willing and able to aggressively move exposure around. The breakdown of asset-class correlations should also broaden the opportunity set for discretionary-macro managers. Commodity trading advisor (CTA) based trading strategies are another potential beneficiary. Given our expectation of further volatility in asset markets, we believe they may continue to outperform for the foreseeable future.

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