Hedge funds like the sort of stock market volatility predicted this week by a US investment bank: Morgan Stanley claimed that if the UK votes to leave the European Union, shares in the FTSE 100 could underperform by 20%.
In the hedge fund industry based in London’s Mayfair, that prospect has profit potential.
Any drastic movement in the share prices of Britain’s biggest listed companies could be a trigger for hedge fund managers to perform a classic manoeuvre: making profits by betting on slumping share prices. Known as shorting, a fund borrows shares from a City investor who charges a fee for the service. The fund then sells the shares in the expectation of buying them back more cheaply when the price falls, and then returning them to their rightful owner. The difference between the two prices is pocketed as a profit by the hedge fund.
But the prospect of some profitable trading is not the key reason why many of those in the hedge fund business – led by billionaires Crispin Odey and Sir Michael Hintze – are backing Brexit.
Most of the big City firms and institutions – from Goldman Sachs and Citigroup to the Lloyd’s of London insurance market and the City of London Corporation – believe Britain is better off staying in the EU. Leaving, they argue, would endanger the status of the City as Europe’s financial centre, and growth prospects across the wider economy.
But many of the Mayfair-based hedgies have no such worries and are backing Brexit with both words and cash.
They have clear professional reasons why they want the UK to leave the EU: a dislike for what they regard as overburdensome – and profit-reducing – regulation.
According to one source close to the industry: “I think there’s a genuine conviction they have that all regulation is rubbish.” But, he says, the profit potential from leaving is also a factor: “They love taking a view ... Market dislocation is fine if you’re a hedge fund guy.”
Hintze, a major Tory donor who founded the hedge fund CQS in 1999, backs the out campaign group Business for Britain and is said to be considering a donation to the Vote Leave campaign. Odey, the founder of Odey Asset Management, is also a backer of Vote Leave.
Odey, however, dismisses the view that hedge fund backers of the anti-Europe campaign are doing it out of self-interest and insists his opposition pre-dates the flood of regulation that followed the 2008 financial crash. “There’s nothing scary for hedge funds per se from Brussels,” he says.
Odey also maintains that not all hedge fund managers are anti-Europe: “The hedge fund industry is not a union or in any way homogeneous.”
There are other out campaigners from another sector of the City not dissimilar to the hedge fund industry: spread betting.
These firms also allow people to make bets on share price movements without actually owning the stock – and like hedge fund owners, a spread better can make a fortune from an economic shock. Anti-EU supporters from the spread betting industry include Peter Cruddas, the founder and chief executive of CMC Markets, and Stuart Wheeler, the founder of rival spread betting firm IG Group.
Those who have studied the funding plans for both sides of the referendum campaign believe the Vote Leave group already has £3m-£5m at its disposal. The rush to raise money is intense because there is no limit to what is allowable before the referendum officially gets under way. Once the date for the referendum is called, there is a £7m spending cap for both the in and out campaigns.
Sir Michael Hintze
The hedge fund manager, who is said to be worth around £1.2bn, is widely believed to be considering a big donation to the Vote Leave campaign. A major philanthropist, he has given £3.2m to the Conservative party over the last 10 years. He and his wife have donated £5m to the Natural History Museum in south Kensington – the largest single gift the museum has received in 133 years – and they have also given £2.5m to the National Gallery and made donations to the Old Vic, Oxford University, the University of Sydney and others.
Hintze was born in China but left for Australia with his parents when he was a child and went to university in Sydney where he studied physics and engineering. He went into finance, and became head of equity trading at Goldman Sachs in London before starting up his hedge fund CQS in 1999.
A former Goldman Sachs banker, he was caught up in the controversy that resulted in Liam Fox resigning as defence minister. During a furore over the extent to which Fox had benefited financially from private backers, it emerged that Hintze’s company had been helping to fund some of the politician’s activities. During a week of revelations about the links between Fox and his best man, Adam Werrity, it emerged that Werrity had the use of a desk at Hintze’s offices in London.
Odey has backed the Vote Leave group financially, although he says he hasn’t given a “lot of money”. He says talk about hedge fund managers wanting to come out of Brussels because of the directives introduced after the financial crisis that might have affected their industry is “all crap”.
Briefly married to Rupert Murdoch’s daughter Prudence, Odey says “Europe hasn’t exactly covered itself in glory”. The Sunday Times estimated the joint wealth of Odey and his current wife, Nichola Pease, at around £1.1bn as of April 2015 and since then he is believed to have made more than £200m from the fall in share prices on the volatile Chinese stock market.
The Oxford-educated financier, who paid himself £48m last year, warned in December that major economies were entering a recession that “will be remembered in 100 years”. He described it as the best time to bet on shares slumping in value since the financial crisis.
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