As we warned heading into the Brexit vote, it appeared that many human investors had quite a bit of misplaced confidence in the Remain vote, and it ultimately turned out that we were right. It also turns out that the algos have traded the event better than humans as well.
Despite the polls indicating a Remain vote heading into Brexit, which led many investors to bet on what could perhaps be considered a preferred outcome, algos weren't reflecting that "projection bias" and continued to signal buy in more risk-off assets such as the yen, gold and government bonds the WSJ reports.
Yves Balcer, co-founder of Fort LP, a model-driven investment firm with about $2 billion in AUM, expected Britain to vote for remaining in the EU, however Balcer's trading model was just focused on the global economic environment, and thus the firm continued to buy assets such as the yen and government bonds which ultimately benefited from the Brexit vote. "We didn't change anything ahead of Brexit" Balcer said. As a result, both of the firm's portfolios were up more than 3% on Friday.
Equity hedge funds fell 2.1% on Friday alone according to data from Chicago-based Hedge Fund Research, and the losers generally appear to be funds too heavily weighted toward cyclical stocks such as airlines or financials.
One macro fund run by H20 Asset Management was hammered on Friday, losing 14.4% according to Bloomberg.
As a reminder of what happened following Brexit to those who were positioned in riskier assets, the Euro STOXX 50 experienced its largest 1-day drop ever
And the Sterling experienced a 12 sigma move
As for EU bank stocks, we will just leave this chart here...
CTAs on the other hand, who use customized trading algorithms in order to spot trends and place trades were blocking out the Brexit noise and favoring government bonds, gold, and yen, while avoiding riskier assets. The result is that many algos actually made money after the Brexit results came in. "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 - Altegris stuck with gold and yen bets.
Quantitative Investment Management, a computer-driven firm based in Charlottesville, Virginia gained 3.6% on Friday according to Bloomberg.
While the algorithm driven funds were doing their thing, many large hedge funds turned to Harvard historian Niall Ferguson for his private views. Ferguson has been consulting with hedge funds and other investors on political projections since 2007 said that he has had a "reasonably high success rate". On June 9, Ferguson predicted a 65% chance that voters would elect to remain in the EU, on June 14 Ferguson lowered the chances to 55%, and immediately before the vote Ferguson gave the Remain vote a 50% chance - said otherwise, he was paid to let hedge funds know that the vote could go either way, what is the ROI on that? If funds chose to invest in risky assets due to that, we're sure not very good.
Not everyone chose to make a bet on the outcome however. Steve Cohen told his traders at his $11 billion firm to avoid making any kind of wager related to Brexit - advice many undoubtedly wish they received earlier.
One final note, as we pointed out this morning, while the initial panic may be behind us, the impact of the referendum is far from over.