Let's dispense with the week and focus on one day, Thursday, for as we said in last week's note, the 23rd would be all that mattered. And so it was. We noted we were perplexed by the sanguinity of some, their reliance upon unreliable bookmakers rather than basic risk management tenets difficult for us to comprehend. When taking into account the typical margin of error for similar polls, the results were in line so I am perplexed at those who are perplexed at what was always a coin toss. The pain trade was always the leave vote, regardless of where the markets closed on Thursday since no playbook for the aftermath existed.
Fortunately, hedge fund nets were already conservative, down 30 percent YOY and gross down by 15 percent. For all the red I see on my screen Friday, with the significant European markets closing lower by 3.2 percent (U.K.), 12.5 percent (Italy) and 6.8 percent (Germany), they are, for the most part, in line to better than where they closed 7 trading days ago. Not quite befitting a complete characterization of "orderly" this is quite far from a Lehmanesque panic moment. In fact, I would say the selling is justified and have every expectation that it will continue.
U.S. equities recovered from pre-market indicated lows but have not had success in staging any type of rally through early afternoon. For the most part, our managers had previously ratcheted down their exposures and bought protection in the form of out of the money puts on the S&P 500 and EuroStoxx. However, a lot changed over the last week including a reset of the markets as they traded higher in the days leading up to the vote. Overall, financial exposure, the sector experiencing the most pain Friday, declining 6-9 percent, was the lightest across the portfolio.
Observations:
In our view, the selling is not over and this is not a buying opportunity; there are too many unanswered questions.
