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Doubting disaster capitalism

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Summary:
A report from Byline Media has prompted talk that Brexit is an example of disaster capitalism: it is supported by vulture investors who hope to profit from economic turmoil. I’m sceptical of this. For one thing, I’m not sure the data supports this claim. Take, for example, the publicly-declared short positions taken by Crispin Odey’s firm, Mr Odey being one of Brexit’s biggest backers. These are not so much in firms that’ll be hard hit by Brexit but instead in those that are troubled already – such as Debenhams, Intu, Metro Bank and IQE. Betting against these isn’t especially clever or sinister. It’s just a bet on momentum – that past losers continue to lose money – and on a continuation of the pattern uncovered years ago by John Campbell, that distress risk doesn’t pay. That Odey is

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A report from Byline Media has prompted talk that Brexit is an example of disaster capitalism: it is supported by vulture investors who hope to profit from economic turmoil. I’m sceptical of this.

For one thing, I’m not sure the data supports this claim. Take, for example, the publicly-declared short positions taken by Crispin Odey’s firm, Mr Odey being one of Brexit’s biggest backers. These are not so much in firms that’ll be hard hit by Brexit but instead in those that are troubled already – such as Debenhams, Intu, Metro Bank and IQE. Betting against these isn’t especially clever or sinister. It’s just a bet on momentum – that past losers continue to lose money – and on a continuation of the pattern uncovered years ago by John Campbell, that distress risk doesn’t pay. Johnsondis

That Odey is using such humdrum strategies draw our attention to a big problem with the idea of disaster capitalism. It’s that fund managers are not evil geniuses. The performance of most hedge funds has for years been mediocre. Hedge Fund Research, for example, estimates that equity hedge funds have made only 4% per year over the last five years. And indeed, some of Mr Odey’s funds have done much worse than this: his Odyssey fund has lost a lot.

What’s true of hedge fund managers is true (pdf) of long-only ones too.  The FCA has concluded that these “did not outperform their own benchmarks after fees.” And City University’s David Blake (pdf) has found that "the vast majority of fund managers in our data set were not simply unlucky, they were genuinely unskilled."

Such evidence is a big problem for the “disaster capitalism” theory. Yes, it is likely that the uncertainty caused by a no-deal Brexit will cause some companies to be mispriced, just as the shock of the 2016 referendum result did*. And some people will make money from this, just as a few capitalists occasionally do well at any time.

But the idea that there’s a cabal of masterminds engineering Brexit in order to profit from such mispricings seems implausible. As every equity investor knows, there’s a world of difference between knowing that there are some mispricings out there and being able to profit from them. The record shows that fund managers lack the skills to do so.

Yes, some Brexiters have taken aggressive positions. But I suspect this is an example of correlation without causality. Support for a hard Brexit is an out-of-consensus position among financiers, most of whom back Remain. And people who take contra-consensus views on one thing are likely to take aggressive positions on other things. But this doesn’t mean they are right.

In truth, there’s a good reason why most financiers favour Remain. Fund managers make their money not so much from clever trading as from attracting clients. They are asset gatherers more than fund managers. The best way to increase funds under management is for the economy to do as well as possible, so that mugs potential clients have both the cash and risk appetite to invest in funds. Remain is in the interests of most fund managers. Not everything is a zero sum game.

* It might well cut the prices of many stocks but in most cases this will be because it reduces future earnings too.

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