We’ve all had the weekend to think about the deeper impacts of Brexit. While the future narrative of the U.K. seems just as uncertain as the night of the vote, the markets is a space where you can see effects in real-time. Brexit may not have felt like a ‘crisis period’ for everyone; but it sure did for anyone in the UK, not to mention Italy and Spain – which saw record down moves in their stock markets. Which brings us to one of the best crisis period performers around – Managed Futures. Just how did they do on the Brexit days of Friday and Monday? Via the SG CTA Index:
As a whole, Managed Futures fared well in this binary market environment, a feat in its own right. The majority of the managers we have talked to are slightly below and slightly above these average numbers. And most are likely giving back some of the gains today as we see the proverbial dead cat bounce.
How do they do it? Did they predict the Brexit vote? Unfortunately, it’s not nearly that sexy. They did it by being boring, mostly. By canvassing the globe with small bets in a lot of different places – like US and foreign bond markets, like foreign currencies, like metals, and more. The ability to capture these types of moves doesn’t come from outrageous bets against the bank of England like George Soros made popular. The ability to capture them comes from being in all the moves, small and large. The Alpha comes from making sure you lose less on the small moves that don’t pan out than you make on the large moves that do pan out.
This ability to be in many places at once, to canvas the globe with both long and short bets in markets as varied as Soybeans and Japanese Bonds is the entire point of having alternative investments as part of your portfolio. It’s this ability to pull returns from different return drivers – ones others didn’t see coming. Managed Futures, in particular, know how to react in these crisis market environments, while at the same time having a non-correlation during stable market environments.
Who knows if this is a blip on the global radar or the start of the next financial crisis. More than a few have laid out the potential for it to set off a domino effect across the region in a sort of ‘Lehman Bankruptcy’ moment. But one rather smart Brit we spoke to had a different take, mentioning they (England) have been in the European Union for just 40 out of 2000 or so years, so no need to panic.