The Mythical Bets On No-Deal Brexit

It’s very hard to correct things that go viral, however wrong they are. Nowhere is that more true than in the febrile atmosphere of pre-Brexit Britain, where allegations that the new Prime Minister is backed by “speculators who have bet billions on a hard Brexit” have been made by, among others, the U.K.’s former Chancellor of the Exchequer, Phillip Hammond, and the Prime Minister’s own sister. “There is only one outcome that works for them,” wrote Hammond in The Times; “A crash-out no-deal Brexit that sends the currency tumbling and inflation soaring.”

It’s certainly a comforting idea for (former) Tories who don’t want to believe that the leader they chose might simply want whatever form of Brexit will keep him in power – even though everything he has done or said in the last five years or more has been about getting himself into No.10 Downing Street and staying there as long as he can. If they can find some evil Svengali to blame for his apparent willingness to drive the country over the no-deal cliff, then they won’t have to admit that their golden boy is fundamentally only interested in himself. So they are looking for a scapegoat. Now, everyone knows hedge funds are rapacious capitalists grinding the faces of the poor, don’t they? Obviously, then, if they are backing Johnson, they can have only one objective, namely to force him to deliver the damaging no-deal Brexit that – thanks to some unwise reporting and a viral meme – everyone now believes they all want.

To be sure, some hedge fund managers make no secret of their desire for no-deal Brexit. Crispin Odey, for example, not only backed Johnson for Prime Minister but – according to a recent Channel 4 documentary –  also advised him to suspend (“prorogue”) Parliament to force through no-deal Brexit. Johnson’s attempt to follow Odey’s advice ended ignominiously when the U.K.’s highest court ruled it unlawful.

But not all of them do. Marshall Wace is jointly run by Paul Marshall, who supports Brexit, and Ian Wace, who doesn’t. See, Brexiters and Remainers can unite, when there is profit to be made. And it is possible to profit from no-deal Brexit even if you don’t support it. Shorting the pound would be a no-brainer for anyone in the hedge fund fraternity, however pristine their Remain credentials.

So we might expect that as October 31 approaches with no sign of a deal, hedgies might short the pound whether or not they backed Johnson’s campaign. But that’s not what is being alleged by those who claim that speculators are placing billions of pounds of bets on no-deal Brexit. No, the focus is on equities. According to The Sunday Times, hedge funds like Odey are shorting British companies in expectation of a stock market crash if the U.K. leaves the EU without a deal. Allegedly, Odey has placed £300m ($370m) of bets against a variety of U.K. companies.

But hedge funds are, by definition, active fund managers, and shorting is one of the tools of an active manager. Indeed, some funds are “long-short,” meaning they take long positions in companies they expect to perform well and short positions in companies they expect to underperform. Odey is a prolific shorter: data from the U.K.’s Financial Conduct Authority show that between January and August this year, his funds have placed 141 shorts against a multitude of blue-chip U.K. companies. At the time of writing, he has 14 active shorts:

Nearly all of them have been placed this month, September 2019. The most recent is a short position on the British challenger bank Metro Bank. Now, this is strange. Back in August, The SundayTimes claimed that Odey had shorted Metro Bank on the day Johnson was elected Conservative party leader, the clear implication being that this was in anticipation of the bank’s share price falling on no-deal Brexit. But although Brexit isn’t due until October 31, 2019, Odey seems to have allowed that short position to expire. Why would he do this, if the purpose of the position was to profit from Metro Bank’s share price falling when the U.K. leaves the EU? And why would he now short it again, when no-deal Brexit is looking less likely?

The truth, of course, is that Odey’s Metro Bank shorts have nothing to do with Brexit. Metro Bank is a badly-run bank which is in big trouble. Three days after the latest short, it was forced to pull a much-needed bond issue after investors declined to participate. The share price promptly fell by a third. This is what Odey was hoping to profit from, not Brexit. And Odey is far from the only hedge fund shorting Metro Bank. It is, to be frank, a stock that richly deserves shorting.

Examining the rest of Odey’s shorts finds a similar story. For example, in the same article The  Sunday Times accused him of disloyalty for shorting Royal Mail and Intu:

His apparent lack of confidence in flagship British groups, including Royal Mail and the shopping centre owner Intu, implies that he expects their share prices to fall as the pound continues to tumble.

But the truth is that both companies have problems that are nothing to do with Brexit or sterling. Royal Mail’s share price has been falling all year due to dismal profits, a worsening business outlook and deteriorating labor relations. It is now looking for a new U.K. chief to try to restore its fortunes. And Intu is reeling from a massive drop in income due to several large retail tenants coercively cutting their rental terms with the agreement of the U.K.’s bankruptcy courts. It is now looking for a buyer.

In short, despite his vocal support for no-deal Brexit, I don’t see any evidence that Odey’s funds are shorting U.K. companies in anticipation of no-deal Brexit. If I were to criticize Odey for anything, it would be for high fees and an uninspiring performance. It is not clear to me why we should take Crispin Odey’s views on the economic benefits of Brexit seriously when his Swan fund’s performance since the June 2016 referendum looks like this:

Maybe someone should be shorting Odey on no-deal Brexit?

When I look at short positions from other hedge funds, such as Marshall Wace, I find a similar story. The Sunday Times castigated Marshall Wace for shorting Kier Group, Easyjet and Severn Trent Water. But there are good reasons for shorting all three. Kier Group has just reported a £245m full-year loss after coming close to collapse in June. EasyJet, like other U.K. travel companies, has suffered from poor bookings that are, it is true, partly due to the uncertainty around Brexit, but also partly due to weather conditions, stiff competition and changing consumer habits. Its share price has fallen by 47% this year and it is in danger of being evicted from the FTSE100, though Thomas Cook’s collapse will help its performance. And Severn Trent’s environmental performance was downgraded in July 2019 by the U.K.’s Environment Agency. Bringing it back up again will increase costs and reduce profits.

In short, there is no evidence that the hedge funds that have backed Johnson’s election campaign have “millions of pounds” of speculative bets on no-deal Brexit. They have millions of pounds of speculative bets on U.K. companies, yes, but that is simply business as usual. So this is yet another a tin-foil-hat conspiracy theory. But no doubt it will continue to run. Already, the opposition Labour party has called for an inquiry into Johnson’s “conflict of interest.” It is fair to say that financial backing from companies that hope to profit from a no-deal Brexit, even though there is no evidence that they have has yet placed significant bets to that effect, places Johnson under some psychological pressure to deliver what they want even at the expense of the best interests of the country. But if he is any good as a Prime Minister, he will resist this. And if he isn’t, then he shouldn’t be in the job.