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Brexit: Many fund managers expect performance and investment decisions to be affected

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Many fund managers expect performance and investment decisions to be affected, while institutional investors expect to commit less to the UK via Preqin

Also see top hedge fund letters

Both the UK and EU (excl. UK) alternatives industries have grown in recent years, although the assets under management* (AUM) of the UK industry is larger for both private capital** and hedge funds. UK private capital AUM stands at a record $490bn, an increase of $30bn between the end of Q4 2014 and the end of Q3 2015 (the most recent data available, Fig. 1). Private capital AUM in the rest of the EU stands at $333bn as of Q3 2015, and has seen a 55% increase in assets from December 2010, compared to 40% growth for the UK industry as a whole in the same period.

There is a much wider spread between the size of UK and rest of EU hedge fund industries, mainly due to London’s role as a financial centre and the high concentration of hedge funds based there (Fig. 2). As of March 2016 (the most
recent data available), AUM of the UK hedge fund industry was $472bn, nearly 3.5 times the size of the EU hedge fund industry.

In most alternative asset classes, UK fund managers are outnumbered by those headquartered in the rest of the EU, with the exception of natural resources and hedge fund managers that are predominantly based in the UK (Fig. 3).

The numbers of institutional investors in each alternative asset class follow a similar trend to the locations of fund managers, with the exception of natural resources (Fig. 4).

The referendum on the UK’s membership of the EU on 23 June 2016 saw a majority vote in favour of leaving the Union, with the result leading to volatility and uncertainty both politically and in the markets. In light of the result, Preqin surveyed 142 alternative investment firms (75 closed-end private capital fund manager and 67 hedge fund managers) to determine their future investment plans in the UK and the rest of the EU over both the short and long term, as well as the impact Brexit is likely to have on their portfolios and business operations.

While there will be no immediate exodus of UK-based alternative asset fund managers, there are notable proportions of managers that are considering their position (7%) or are uncertain (17%) about their operations remaining in the UK (Fig. 5). Private
capital fund managers are more likely to be considering a move than hedge fund managers (13% vs. 3% respectively).

No UK-based respondents stated that they will defi nitely move some of their business operations from the UK as a result of Brexit, and the vast majority are not anticipating any changes to business operations in the future.

The largest proportion (45%) of private capital managers believe the Brexit decision will have no effect on their portfolio in the next 12 months (Fig. 6). Hedge fund managers were more positive regarding the short-term impact, with 31% stating they thought the referendum results were set to have a positive impact. Shortly after the results of the referendum were announced, perhaps unsurprisingly, approximately a quarter of all respondents remain uncertain of the implications. Fund managers are much more
uncertain of the longer term impact of Brexit on their portfolios (stated by 38% of respondents), although 40% believe it will have no effect in the long term (Fig. 7).

Again, hedge fund managers were more optimistic, with no respondents believing it will negatively affect their portfolio, and 23% believing that the longer-term impact will be positive. Private capital fi rms are more nuanced in their views on the long-term impact, with similar proportions believing the impact will be positive (9%) and negative (13%).

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