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The lessons for investors from the “Brexit Big Short”

A group of Bloomberg journalists have been investigating how some hedge funds made huge profits in the wake of the referendum result in 2016. Here I summarise their findings and assess the ramifications for investors in 2019.

Background

Most people are well aware that the referendum result in 2016 was quite a shock. The Remain campaign had been tipped to succeed right up to the night. When Leave one, many people were caught off guard. But not one group of investors, who calmly cleaned up as the market absorbed the result and sold off the pound.

The basic mechanism

Making money from falling prices is a well-known technique in the City. It can be done a number of ways, some of which involve using derivatives. These methods are loosely summed up as “short selling”. I cover it in more detail in other videos. Leaving aside the detailed mechanics, the key issue here is this – given that betting on falling prices is highly risky, how were some funds so confident that they would get their huge bets right? The answer is that they may have had an edge on the night.

Exit polls

Predicting how crowds will behave in a given set of circumstances is hard. But it isn’t impossible. What a group of Bloomberg journalists noticed on the evening of the referendum was that a few of the biggest names in polling refused to make a public prediction, claiming the result was too close to call. Whilst this is true, it seems the truth was they were being paid to give private polling data to certain hedge funds. This would have given these funds an information edge on the night – whilst many others expected Remain to win, they had early evidence that this was not likely to be the outcome.

A double whammy

Confident that a Leave victory was looming, hedge funds could now pull off two wins – as sterling rose on the night to reflect a likely Remain victory they could jump on that bandwagon and make money. However, anticipating a switch in sentiment, they could then place downbets on the pound and make much more money as sterling subsequently plunged.

Why this matters

So far, you may think, “so what?”. However, this sort of activity matters on two levels. First off, the FCA needs to decide whether access to polling information that was price-sensitive is a problem when that access is not public. And secondly, this whole saga piles on the evidence for investors that the mainstream media and other outlets are increasingly behind the curve – some might say irrelevant – when it comes to weighing up events like the 2016 referendum. This, in turn, has wider ramifications for how and where we consume investing data. For example, I already rely more heavily on blogsites for much of my investment analysis than I do traditional media websites. And I am not alone – Bloomberg recently bought in the services of a key blogger, Barry Ritholz, for just this reason.

To find out more

You can watch the original video, or email me at the usual place – editor@killik.com