The weeks leading up to the June 23 referendum on whether the U.K. should remain part of the European Union were rife with speculation. Many worried about what a so-called Brexit would mean for the global economy, and firms based in the U.K. were particularly nervous. Some took matters into their own hands, donating to campaigns that became known as simply Leave or Remain. David Harding, founder of London-based Winton Group, donated £3.5 million ($4.6 million) to the Remain campaign, going so far as to become joint treasurer of the Britain Stronger in Europe campaign. In May he told the Financial Times that he backed the status quo because healthy capital markets in the European Union were important to Winton’s success.
So it was more than a little ironic when, in the days following the Brexit vote, Winton earned $1.1 billion thanks to bets against both the British pound and the euro, as well as long plays on fixed income, gold and the yen. After the votes came in, the pound sank to its lowest value since 1985, and stocks around the world took a nosedive. Gold, meanwhile, spiked, and U.S. investors began to predict that the turmoil would encourage continuing inaction on interest rates by the Federal Reserve. Winton’s flagship fund gained 3.1 percent on June 24 alone.
“I was sad about the Brexit vote, but it would be churlish not to admit that my sadness was somewhat tempered by the resulting success of our funds,” Harding tells Alpha. “They do say, ‘It’s an ill wind that blows nobody any good.’”
Winton’s positions ahead of Brexit are representative of a strategy that has led to significant growth at the firm over the past several years. This year Winton is ranked No. 1 on Alpha’s annual Europe 50 ranking of the largest hedge fund firms in Europe through January 2016. The firm had $33.8 billion in assets as of December 31, up from $27.8 billion a year before, but assets have since grown to $34.9 billion. Harding edged out his former employer Man Group, which held the top spot last year. (Harding co-founded that firm’s flagship Man AHL systematic trading fund and lends the “H” to its name.) London-based Man comes in at No. 2 with $31.8 billion as of December 31, having experienced more-subdued growth over the past year.
Brexit boosted many firms, but it dragged on others. Some firms that experienced significant growth in 2015 are struggling this year. Crispin Odey’s London-based Odey Asset Management reported a 107.1 percent increase in assets in 2015, bringing its ranking up from No. 21 to No. 12, but the firm is having a brutal 2016: Though its flagship Odey European fund gained 6.57 percent in June, it reportedly was down about 24 percent for the year as of mid-July. Toscafund Asset Management, founded by Tiger Cub Martin Hughes, also has taken a recent turn for the worse. The London firm grew its assets by 40 percent last year, raising it to No. 32 from No. 35 on the ranking, but its flagship Tosca fund posted a 14.7 loss in June of this year, in part because of equity market declines in the wake of Brexit.
London-based Pelham Capital, founded by Lansdowne Partners veteran Ross Turner in 2007, grew its assets by more than 30 percent last year and remains at No. 30 on the ranking, but it also has suffered this year, with its $4.5 billion flagship long-short equity fund losing 10 percent in June. Pelham has since regained its losses, however, and was flat for the year through July.
Other firms that did very well in 2015 include Henderson AlphaGen, which moves from No. 12 to No. 8 on the ranking after its assets grew by more than 31 percent last year — thanks, according to CEO Paul, to the firm’s Octanis UCITS fund — and TCI Fund Management, which grew its assets by 24 percent over the same period, bumping it from No. 14 to No. 13. Brevan Howard Asset Management, which ranked No. 1 in 2014, has remained in third place for two years running, losing 12.3 percent in total assets during 2015 and falling to $23.7 billion. GAM keeps its No. 4 spot for the second year in a row after growing assets by 3.6 percent. Marshall Wace rounds out the top five once again, with $22.8 billion in assets, despite gaining a whopping 24.3 percent — more than $4 billion — in assets over the previous year. Aspect Capital grew assets by 6.5 percent, to $4.9 billion, putting it at No. 27 after coming in at No. 24 last year. Christopher Reeve, senior product manager at the firm, tells Alpha that Aspect now has about $6.4 billion under management after acquiring Auriel Capital Management earlier this year. Capital Fund Management, a systematic firm based in Paris, moved from No. 32 to No. 18 on the ranking after it grew assets by 84 percent last year. CFM President Philippe Jordan attributes that growth to positive returns and an increased focus on creating onshore solutions for clients in their home regions.
Notably, BlueCrest Capital Management, which had been in the top five for the first three years of Alpha’s ranking and slipped to No. 7 last year, has fallen off the list entirely. In December the firm announced it would return about $8 billion to investors and essentially become a family office managed by co-founder and CEO Michael Platt. BlueCrest’s assets had decreased sharply, in part because of the spin-off of Leda Braga’s $9.1 billion Systematica Investments — No. 15 on the ranking — and in part because of regulatory questions about a potential conflict of interest stemming from the firm’s internal fund, BlueCrest Staff Managed Account.
Europe’s 50 biggest hedge funds managed more than $393 billion combined at the beginning of 2016, up from $374.2 billion the previous year. The industry as a whole reached $2.9 trillion in the second quarter, according to Hedge Fund Research. The growth largely resulted from trading on Brexit volatility and a decline in investor redemptions.
Winton executives say it’s hard to pin their firm’s growth down to any one factor, noting that no single program or strategy has surged past the others. Instead, Andrew Moss, CEO of Winton Investment Management — a division of Winton Group — points to the firm’s increased focus on serving clients where they are. Winton has continued its international expansion over the past year, growing its footprint in New York and opening its first U.S. West Coast office, in San Francisco. The latter is a strategic move to direct more resources toward data science. This commitment to answering client demand for better services and accessibility has allowed Winton to retain its best clients and continue to grow in assets, according to Moss, who says the firm has invested heavily in global expansion; it now has nine offices around the world.
Winton, a systematic trading firm, also has benefited from the rise of computer-driven investing. The Winton Futures Fund’s assets rose 8.8 percent, to $12.7 billion, from the beginning of 2015 to the beginning of 2016, while the Winton Global Equity Fund gained more than 25 percent in assets, starting this year at $1.08 billion. The Winton Evolution Fund, which has more of a focus on equity investing than the other programs, rose 10.5 percent, to $348 million. In the fourth quarter of 2015 — the latest relevant period for this ranking’s data — macro hedge funds and commodity trading advisers continued a trend of leading the pack for asset inflows, bringing in $2.5 billion in new capital, according to HFR. Trend-following systematic diversified CTA funds were the biggest part of that growth, receiving $1.7 billion in inflows that quarter. The trend has continued in 2016, with systematic funds rising to $270 billion in assets in the second quarter — their highest level since the first quarter of 2015.
“The broader push within the money management world to embrace quantitative investing has been spurred on by the long-term success of firms such as Winton,” Harding says. “We have a history in machine learning that stretches back decades, and it is exciting to be able to apply our experience and resources in this field ever more widely.”
Man Group, the largest publicly traded hedge fund firm in the U.K., gained 5 percent in assets in 2015. Like Winton, Man Group has been paying close attention to clients’ changing needs. Much of the firm’s recent growth, according to president Luke Ellis — who will become CEO in November, when Emmanuel Roman leaves for Pacific Investment Management Co. — has been spurred by an increased focus on diversification. Within the flagship Man AHL fund, which grew its assets by 4.9 percent between January 2015 and January 2016, investment options now range from products that are 100 percent momentum-focused to those that may use no momentum at all or focus on very niche markets, Ellis says.
“The biggest area of growth in the past six to 12 months has been where we sit down with a sophisticated institution and build them their own bespoke combination,” he explains. “A year ago I would have said that’s something we don’t do. Sitting here today, it’s the center of most of the conversations we have.”
That change is a necessary reaction to a rising demand for yield thanks to low — and in some places negative — interest rates. The current environment is confusing for asset managers, whose job is to allocate capital efficiently. That definition, Ellis notes, assumes that capital is scarce. When it isn’t, investing can be complicated. This environment can be a boon for firms like Winton and Man Group that don’t depend on a discretionary fixed-income business. In one example, Ellis says the low-rate environment has made emerging-markets debt — something many managers have long scoffed at — increasingly attractive.
Man’s long-only operations have struggled so far in 2016, with Roman attributing the firm’s 3 percent decline in overall assets in the first half to difficulties in these strategies. But AHL has performed well, according to a statement from Roman, who said the firm’s funds didn’t appear to have been affected by Brexit — at least, not yet. But Ellis points out that this could change.
“There is likely going to be high political drama in the U.K. during the time of year when markets tend to be volatile anyway,” he says. “Even if we might get a bit of peace and quiet in August, I suspect September and October are going to be pretty interesting, volatile markets.”
Many equity funds have already experienced significant turmoil in the wake of the Brexit vote. Paul Marshall of Marshall Wace reportedly donated $147,000 to the Vote Leave campaign, while partner Ian Wace gave the same amount to Remain. After the results came in, the firm’s $10 billion Eureka fund reportedly lost about 1.5 percent, bringing its total losses this year up to 3.6 percent.
Even that may not make much of a dent in Marshall Wace’s recent growth. The firm ranked No. 1 on Alpha’s Hedge Fund Report Card this year after experiencing a 19 percent gain in its $1.1 billion MW Market Neutral TOPS fund and a 12 percent return in the $7.5 billion MW Eureka (euro) Fund in 2015. Last year KKR & Co. acquired a 24.9 percent stake in Marshall Wace.
“We’re not, at this point, unduly worried about Brexit-related volatility,” Marshall says. “Markets have recovered, and as the majority of our strategies are nondirectional or market neutral, some volatility is good for stock selection.”
In fact, volatility over the past 12 months has given the firm an opportunity to court more investors looking to avoid high-risk bets that end in blowups, says Marshall, pointing to the recent poor performance of William Ackman’s Pershing Square Capital Management.
“I think what investors are looking for in a kind of post-Ackman type of era is return streams which have multiple sources of alpha, are very robust and have high Sharpe ratios,” he says. “We think that’s what we’re providing. ‘High return for unit of risk’ is kind of the mantra.”
