Who Made Money in the Brexit Chaos? Machines, Not Humans

In the weeks leading up to the Brexit vote, the trading models at many firms adopted a defensive pose.

By Carolyn Cui and Bradley Hope and Gregory Zuckerman

Many investors turned to Niall Ferguson, professor of history at Harvard University, for advice. Photo: Patrick T. Fallon/Bloomberg News        


Wall Street is tallying up the winners and losers after the severe market reaction to last week’s Brexit vote. One theme has emerged early—the computers got it right and the humans got it wrong.

Part of the reason: Too many investors bet on the outcome they preferred, economists and analysts say, a powerful example of “projection bias” in the markets.

Yves Balcer, co-founder of Fort LP, a model-driven investment firm with about $2 billion of assets under management, expected Britain to vote for remaining in the European Union. But his trading model focused on global economic concerns. So the firm continued buying assets like the yen and government bonds, which benefited from the post-Brexit chaos.

“We didn’t change anything ahead of Brexit,” he said. Both of the firm’s two portfolios were up more than 3% on Friday, bringing this year’s gains to 10.75% and 4%, respectively, he said.

Ahead of the vote, nearly all the major public polls, many top politicians and investors like George Soros publicly said they thought the chance of a vote to leave the EU was unlikely, largely because of the potential economic destruction such a move could have. Seeking more insight, some investors turned to other intelligence, and some paid upwards of a half million dollars to get Harvard historian Niall Ferguson’s private views.




Steven A. Cohen, who formerly ran hedge fund SAC Capital Advisors, told his traders at his $11 billion firm to avoid making any kind of wager related to the vote, said people close to the matter, because the vote was too close to call.

Equity hedge funds fell 2.1% on Friday alone, according to data from Chicago-based Hedge Fund Research. The losers generally appear to have been hedge funds too heavily weighted toward cyclical stocks such as airlines or financial stocks that were hard hit in the selloff.

Yet for one set of computers that form strategies about the markets, such sentiment wasn’t even considered.

This fund category, sometimes called commodity trading advisors, or CTAs, uses customized trading algorithms to spot market trends and place bets on futures and other derivatives. Most of the models didn’t factor in British election polls, bookmakers’ odds or the political-tea leaf reading that swayed other investors looking for an edge.

In the weeks leading up to the Brexit vote, the trading models at many of these firms adopted a defensive pose. They favored high-quality government bonds, gold and safer currencies like the yen, while mostly avoiding riskier bets like oil and emerging markets.

That positioning paid off after Brexit caused the pound and more volatile assets to plunge as Thursday’s results came in. Société Générale’s CTA Index gained 1.5% on Friday. AQR Capital Management LLC, Fort and Welton Investments Partners LLC were among the big gainers.

The HFRX Global Hedge Fund index, meanwhile, was down 1.1% on that day. About 15% of all hedge funds use the model-driven strategies of CTAs, according to Agecroft Partners, which consults the hedge funds and hedge fund investors.

A key to CTAs’ success, their managers say, is that their models can tune out noise around market moving events—like an election or crucial economic data—that are important to investors but can be difficult to accurately forecast.

“Our models aren’t going to be affected by the same sentiments a human would be,” said Lara Magnusen, portfolio strategist for Altegris’s main fund, which gained 4% on Friday and appreciated Monday as well. Her firm stuck with gold and yen bets.

A different set of decisions enter the picture for human market pickers. James Hanbury, who graduated from Scotland’s Edinburgh University in 2003, was less sure that the Remain camp would triumph, according to people close to the matter. Mr. Hanbury, who runs a $1.5 billion hedge fund while managing $500 million of additional capital, decided to make a big bet against the British pound.

In the days before the vote, his hedge fund commissioned its own voter poll. It suggested the vote would be close, though it still pointed to defeat for the Leave camp. But the pound was rallying, as if the chances of an exit were minimal. If Britain voted against Brexit, the pound was unlikely to rise much more, but if the vote was for an exit, the currency could plunge, Mr. Hanbury concluded, according to the people.

Sensing an “asymetical trade,” or one that had little downside but big potential upside, Mr. Hanbury decided to act, the people say, hoping to turn around a year that at that point had resulted in losses of more than 5% for his fund.

Over several days, Mr. Hanbury purchased investments serving as wagers against the pound.

His fund scored profits of about $150 million over Friday and Monday, the people say, among the biggest gains that have emerged for investors over the period. As of Tuesday, Mr. Hanbury retained his bearish positions on the pound and was sitting on small gains for the year.

A group of large hedge funds turned to Mr. Ferguson of Harvard before the vote. On June 9, Mr. Ferguson predicted there was a 65% chance voters would elect to remain in the union. On June 14, Mr. Ferguson lowered the chances to 55%, and it was 50% immediately just before voting began.

Mr. Ferguson, who has been consulting hedge funds and other investors on political projections since at least 2007, said over time, he has “a reasonably high success rate.” The predictions he shares with hedge fund clients are private.

“Almost nobody got this one [the Brexit vote] right,” Mr. Ferguson said in an interview on Tuesday. “Anybody who called it right was more lucky than prescient.”

For a lot of people involved in financial markets, voting for Brexit just seemed like insanity, like mass suicide,” said George Loewenstein, one of the founders of the field of behavioral economics and a professor at Carnegie Mellon University. “They simply couldn’t or were unable to take the perspective of the people who supported Brexit.”


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