July 7, 2018 at 10:14Bloomberg: Hedge Funds Find Out Brexit Outcomes Others and Earn Billions
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Bloomberg published a story about the collaboration of hedge funds with the organizers of the British election polls. Thanks to them, financial companies multiplied their profits many times, being able to prepare for a situation where, contrary to forecasts and the first calculated results, the British voted to leave the European Union. In our material - the main facts of the investigation.
Pound fluctuations on the night of the vote
The Brexit referendum, in which the residents of the UK decided on whether the country should remain a member of the European Union, was held on June 23, 2016. On the night after the referendum, the British currency rate made an extraordinary leap: first it rose on expectations that Britain would remain part of the European Union following the referendum, and fell to the value of 1985 by morning.
To date, the pound has fallen even lower and amounts to ~ $ 1.32 dollars. The situation that occurred due to the outcome of the referendum with the pound and the market as a whole, economists call the Black Swan . This term is applied to difficult to predict, rare events that have significant consequences for the market.
Unfulfilled forecasts
Since the start of the EU exit campaign, the pound's dynamics have depended heavily on surveys published by UK opinion centers. Before the start of voting, the most influential polls predicted that Britain would remain part of the European Union.
On the night of July 23-24, the value of the British currency intensively correlated with the news of preliminary voting results. The attention of traders was riveted to the results of exit polls - surveys of citizens who participated in the vote. By law, these data could be published only after the completion of voting. The market was waiting for the publication of exit polls and the first messages from polling stations.
At first, the results were in line with forecasts: after 22:00, Sky news channel reported that an online survey conducted for them by the famous YouGov research center confirms the preponderance of pro-European votes: 52% versus 48%. The likely defeat of the Brexit campaign was also reported by Nigel Faraj, a former resource broker and leader of the United Kingdom’s Independence Party , which advocated secession from the EU. After that, at 22:52 pound reached a record high.
As the votes were counted, panic increased among traders: for example, a message that appeared at 00:16 that in Sunderland 61.3% instead of the projected 53% voted to leave the EU, a minute later caused the pound to fall by 4%. Further events developed dramatically: all new messages about unfulfilled forecasts led to a further decrease in the currency.
Unexpected result helps hedge funds make billions
Not for all market participants such a development was a surprise. According to Bloomberg that day, hedge funds aiming to win the auction hired YouGov and at least five other public opinion polling companies. Questionnaires sold critical information to hedge funds, including preliminary exit polls.
For seven months, Bloomberg conducted interviews with more than 30 current and former heads of public opinion institutes, consultants and traders, almost all of whom spoke only on condition that they were not called due to confidentiality agreements. Survey companies said they thought Brexit had one of the most profitable days in their industry’s history.
Advantageous trading opportunities arise not only when obtaining exit polls, but also at any opportunity to prepare in advance for fluctuations caused by a public survey. There are many ways to bet on a currency catastrophe, but derivatives are the primary means for many hedge funds. Their existence means that hedge funds that buy exit polls do not need the right choice. They just had to be more right than everyone else. The more unexpected the victory, the greater the potential profit for hedge funds.
Not the first union of sociologists and financiers
According to Bloomberg, opinion polling companies learned to make money on exclusive data sales back in 2014 during a referendum on Scottish independence. Then, YouGov’s preliminary polls, published a week and a half before the vote, showed the Scots a tendency to secede.
Subsequently, experts noted the critical importance of this publication: the results of the survey caused panic among traders and the subsequent decline in the pound and stimulated the British government to make concessions if Scotland decides to remain part of the UK. As we know, Scotland did not separate.
Insiders told Bloomberg that since the publication of the survey until the referendum, the company received many large proposals from hedge funds to receive the results of the next survey at least an hour before publication, because it would again shake the market.
Then YouGov refused this opportunity, and some of its competitors do not. Sources of Bloomberg report that Survation organized an exit floor and even before the end of the vote sold its results to several of the largest hedge funds in the world. The forecast turned out to be quite accurate and buyers received multibillion-dollar profit.
What is the danger of “trade in opinions”
Relations between public opinion institutions and hedge funds on the eve of and on election day created a conflict of interest: on the one hand, sociologists study and inform the public, on the other, influencing it, they help private clients to bet on market movements created by their polls .
Another bottleneck is in the field of law. Despite the fact that the text of the norm states that prior to the completion of voting, providing “any group of the public” with data that was transmitted to hedge funds is unlawful, the norm can be interpreted in two ways, and there is no judicial practice in these cases in the UK.
The Bloomberg study has resonated and is being considered by a House of Lords committee formed to justify the voting results and their consequences. The Committee emphasizes that given the significant impact of such situations on democracy and public opinion, election campaigns require improved legislative regulation.
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