How Brexit will affect London’s hedge fund industry
London may be the centre of Europe’s hedge fund industry, but Brexit could change all that. Matthew Partridge finds out from one insider how it could be affected.
At the moment, London is the acknowledged centre of the EU's hedge fund industry; 63% of hedge fund managers in the EU are located in the UK, as well as 54% of hedge fund investors. As of last March, UK-based funds had assets of $427bn, compared with $138bn for fund located in the other 27 member states.
However, there are already signs that both investors and firms are very worried about the implications of Brexit with a recent survey by State Street suggesting that 78% of professional investors think that Brexit will have at least some effect on their business model, and a third expect their firm to reduce their operational or organisation presence in the UK as a result of Article 50.
To gauge the mood on the ground, we've spoken to Steve Long, chief risk officer for Avem Capital. Avem is a London hedge fund that runs several funds, including foreign exchange based strategies and venture capital. Having been founded less than two years ago, it is in a unique position because it has always had to "plan for the possibility of Brexit". However, despite this planning it still could be affected by any changes.
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Long thinks it's "difficult to judge" the degree of access to the single market that British financial firms will enjoy after Brexit. While it's very likely that financial passporting will end, it's "less likely than it appears" that British companies will be completely barred from Europe completely. After all, "we're not going to drop all European regulations immediately".
As a result, some parts of the industry will be able to benefit from third-country regimes (or equivalence, as it is known). Overall, he predicts that "while banks and funds will definitely lose access to some parts of the single market, it won't be a terminal blow to the entire industry".
Long is cagey about Avem's specific plans, but he predicts that any fallout from Brexit will hit the retail side of the industry, which sells to individual consumers, much harder than the institutional side, which sells to other firms. Indeed, he predicts that it is "very likely" that retail firms will either open additional offices in Europe or move whole parts of their operations to the continent. In contrast, there is a good chance that institutional firms could remain in the UK, though many will probably move anyway. However, at the moment there is no one particular location that seems to be a preferred destination.
In his view, the recent election result has been a mixed blessing. On the one hand the hung parliament means that "the full range of Brexit outcomes are now on the table". Long thinks that government "is now going to have to take a much more collaborative approach, in order to build a broader appeal. This would imply a much softer Brexit, which in turn would preserve a much greater degree of access.
However, from his discussions with competitors and others in the industry, Long notes that "the worst thing is uncertainty". Overall, Avem's strategy has been to try and mitigate the downside by increasingly focusing on investments, and investors, outside Europe.
Long admits that the UK scientific community is worried about Brexit, especially in terms of access to EU programmes. However, he believes that the "government understands the importance of EU research programmes" and he is hopeful that some sort of deal can be worked out that will enable scientists to keep accessing EU research grants, possibly in exchange for continued UK payments into the EU budget.
From the perspective of the investor, the growing strength of the global technology sector, particularly in emerging markets like North Africa, mean that "there are as many opportunities are there are risks".
However, Long is cautious that whatever happens, we're not going to see a bonfire of regulations once Brexit takes place, an idea that has been put forward by many supporters of a hard Brexit. Not only would this destroy any chance of maintaining some degree of access, there simply isn't the demand within the industry for such radical measures.
While "there is always some scope for regulatory simplification" most of the existing regulation "is pretty sensible", so any major deregulation could damage investor confidence without conferring any significant benefits.
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Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
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