Brexit’s big short: how hedge funds cashed in on exit polls
In the hours after the UK voted unexpectedly to leave the EU, a few cool heads used privileged polling data to reap huge currency market profits
At 10pm on June 23, 2016, Sky News projected the words “In or Out” across the top of a London building as an orchestral score ratcheted up the tension. “In or out – it is too late to change your mind,” declared presenter Adam Boulton. “The polls have closed in the UK’s historic referendum on EU membership.”
After the dramatic intro, Boulton jumped straight in with a huge exclusive. Nigel Farage, the face of the Brexit campaign, had given Sky what sounded like a concession. His photo filled the screen, as Faisal Islam, Sky’s political editor, read Mr Farage’s words aloud: “It’s been an extraordinary referendum campaign, turnout looks to be exceptionally high and [it] looks like ‘Remain’ will edge it.”
In the next segment, Boulton delivered another exclusive. Joe Twyman, head of political research for YouGov, one of the UK’s most prominent polling firms, appeared on set with the results of an online exit poll conducted for Sky. He explained that the firm had been tracking the same voters and they had moved farther into the Remain camp that day. Based on that, Mr Twyman said, “We now expect that the United Kingdom will remain part of the European Union.”
Just four minutes after the polls had closed, Sky had aired a concession from the world’s most prominent Brexit backer, buttressed by data from YouGov. In a few hours these “scoops” would prove spectacularly wrong, but in the meantime they spawned worldwide headlines.
The news pushed the UK’s currency up, hours ahead of one of the largest crashes for any major currency since the birth of the modern global financial system. At 10.52pm, the pound rose above $1.50 (Dh5.51) and reached its highest mark in six months. Viewers watching Sky had every reason to think Remain would prevail.
Behind the scenes, a small group of people had a secret. Hedge funds aiming to win big from trades that day had hired YouGov and at least five other polling companies. Their services varied, but pollsters sold hedge funds critical information, including data that would have been illegal for them to give the public. Some funds gained confidence that most Britons had voted to leave the EU, or that the vote was far closer than the public believed, knowledge pollsters provided while voting was still underway. These hedge funds were in the perfect position to earn fortunes by short-selling the British pound.
Hedge fund managers, of course, try to beat the market by getting the best information they can.
For exit polling data, that is a tricky business. Pollsters have always sold surveys to private clients, but UK law restricts them from releasing exit-poll data before voting ends. While some of the practices discovered by Bloomberg fall into a grey area, the law is clear: It would have been a violation if, prior to the polls closing, “any section of the public” had got the same data the pollsters sold privately to hedge funds.
One person with questions to answer is Mr Farage. He twice told the world on election night that “Leave” had likely lost, when he had information suggesting his side had actually won.
Bloomberg’s account is based in part on interviews over seven months with more than 30 knowledgeable current and former polling-company executives, consultants and traders, nearly all of whom spoke only on the condition they not be named. Pollsters said they believed Brexit yielded one of the most profitable single days in the history of their industry. Some hedge funds that hired them cleared hundreds of millions of dollars, while their industry on the whole was battered by the chaos Brexit wrought in global financial markets.
The private exit poll that appears to have had the most clients was conducted by Mr Farage’s favourite pollster and friend, Damian Lyons-Lowe, whose company is called Survation. It correctly predicted Leave. In an interview with Bloomberg, Mr Farage said he learned of Survation’s results before making at least one of two public concessions that night, meaning there was a good chance he was feeding specious sentiment into markets.
Survation wasn’t alone. As YouGov’s Mr Twyman predicted a Remain victory on Sky, three of his colleagues were watching from the London office of a hedge fund. In addition to the public exit poll for Sky, YouGov earlier sold a private exit poll to this fund, which provided data to traders that matched the results presented on television, effectively giving them an edge for betting on the rise in the pound. YouGov staff code-named it “Operation Pomegranate”. It charged the hedge fund roughly $1 million. Separately, YouGov gave Sky its poll for free. The hedge fund did extremely well, according to three sources familiar with the situation.
Opinion polls published in the British press during the final days of the campaign helped voters make up their minds about which side they were on, but the relationships between polling firms and hedge funds created an inherent conflict. Pollsters fed the public information that affected the outcome and moved the markets, while they also sold data privately to clients betting on market moves created by their public-facing polls.
Two years after the historic vote, the pound is back at $1.32, the bottom of the crash that morning, people remain divided, while the government of Theresa May is deadlocked over how to move forward.
After the world asked how the nation’s leading pollsters could have been so wrong, British lawmakers launched an inquiry. But even members of a House of Lords select committee that looked into the subject had no idea that the companies they were probing had essentially become tools for firms betting on the nation’s mood. The final report made no mention of the relationships between pollsters and hedge funds.
Brexit wasn’t even the first time it happened. In the United States, national newspapers and broadcasters hire pollsters for elections. But the news organisations oversee the design and analysis of the polls and brand them in their own names, giving them greater confidence in the independence of the data. By contrast, election polling in the British press is a brand-building affair for UK pollsters. Charging the press little, or even nothing, they use media polls as marketing tools to attract lucrative commercial clients. About 99 per cent of the more than €4 billion ($5.3bn) in annual industry revenue typically comes not from elections but from marketing-related research, such things as, “Do you prefer Coke or Pepsi?” As the Lords committee report explained, election polls were “described by many of the witnesses as a ‘shop front’” for their commercial activities.
Polling firms found a way to tap clients during the Scottish independence referendum in September 2014. It all started when a pair of polls set off a national panic ahead of the vote. YouGov had nationalists closing the gap, and then, days later, jumping ahead. Nervous investors sent the British pound and bank stocks down sharply. Shocked government leaders responded, just days before the vote, by promising a greater devolution of powers to the Scottish people if they stayed in the UK. Critics would later charge that misleading YouGov data, which proved fantastically off the vote, had shaped the future of an entire country.
The phones in YouGov’s offices rang like mad in the days between the Scottish polls and the referendum. Hedge fund executives were among those on the line. If YouGov was conducting another poll before the vote, traders said, they’d be willing to pay vast sums for a heads-up just 30 minutes to an hour before publication. Traders simply needed to know the results before they became public. They offered YouGov several multiples more than the newspapers had paid to commission the polls in the first place, the two insiders recalled. The company rejected these offers, the insiders said. Survation, along with at least one other pollster, saw other opportunities.
Survation organised and sold last-minute tracking polls and a syndicated exit poll for the Scottish referendum to some of the world’s biggest hedge funds. By early the next morning, it was clear that Scottish voters had rejected independence overwhelmingly. The YouGov poll that had sparked the most turmoil had missed the final mark by a whopping 12 points. Survation’s private exit poll, however, was accurate enough that its clients had what they needed to profit.
In 2015, the Conservatives, under David Cameron, swept to dominance in the UK’s general election. Mr Cameron had promised to hold a referendum on the nation’s membership in the European Union if he won. Hedge funds realised immediately that if the Scottish campaign had moved markets, a referendum on the UK’s membership in the world’s largest trading bloc might shake them to their very core. YouGov started getting hedge fund calls right away. So did the other polling companies.
There were two potential obstacles to hedge fund exit polls. For starters, UK broadcasters normally air the results of their own exit poll at 10 pm, immediately after voting closes. If this happened for Brexit, it might negate some of the advantages hedge funds had from private polls by giving the world definitive information at 10pm, according to polling firm executives. That is because the official exit poll, jointly funded by the BBC, Sky and iTV, and based on 20,000 face-to-face interviews, is the authoritative projection of the day’s voting. It correctly predicted the last four UK general elections.
The face of the broadcasters’ election-night exit poll, its chief designer and interpreter, is a 64-year-old Scottish professor named John Curtice. He enjoys a rare level of trust across party lines and a cult following among political junkies. After the government set a referendum date, the academic spoke with broadcasters and they decided the usual exit poll was not feasible, recalled Sam Woodhouse, a BBC editor involved. They had made the same call for Scotland. Mr Curtice would later tell BBC viewers that his predictive models relied on a comparable vote, and for Brexit there was none, making a credible exit poll an expensive and difficult proposition. However, hedge funds were spending the money to line up their own private polls and he was involved.
He told Bloomberg that polling company ICM paid him for his work on behalf of a hedge fund called Rokos Capital Management. Mr Curtice said he participated “in a couple of phone calls with Rokos, where the design of the polling itself was discussed, alongside the modelling I was doing.” He said he also had discussions solely with ICM. The company conducted an exit poll for Rokos. Mr Curtice said he did not help conduct the poll on the day, nor did he help analyse the results. He said his primary role was to help ICM build a model that enabled the hedge fund to predict the likely outcome of the vote as localities began reporting results. Rokos could then calibrate its trading strategy off a mixture of polling data and results as they started coming in after midnight.
Hedge funds wanted data streamed to them throughout the day so their own experts could track trends, and so they could make bets while people were still voting. But the law broadly defines “publish” as making any data “available to the public at large, or any section of the public, in whatever form and by whatever means”.
As the vote neared in June, Leave’s rising support in polls sank the pound, and hedge funds intensified their negotiations with pollsters. Given the amount of money on offer, several polling company executives said they believed nearly everyone in their industry ended up working for traders in one capacity or another.
As the EU referendum approached, YouGov executives discussed the idea of selling an exit poll exclusively to a single hedge fund for a huge premium, what would become “Operation Pomegranate.” The hedge fund exit poll would help traders predict the results of the one YouGov would release on TV later that night. The hedge fund could then make trades with high confidence, because it could predict how Mr Twyman’s call (52-48 for Remain) would likely move the market, the sources said.
Stephan Shakespeare, YouGov’s founder, confirmed that the polls showed the same thing. But he said it was never his company’s intention to sell private polls in order to help clients predict the outcome of a public poll. Mr Shakespeare also said the “trading strategies of hedge funds are extremely secret. We did not know their strategy and still don’t.” YouGov’s hedge fund client “did not know what the Sky poll would say”, Mr Shakespeare added. “They had their own independent – more detailed and bigger data. But the outcome was the same.”
YouGov’s agreement with Sky specified that if the results were within five points, the pollster had the option of saying on air that the vote was “too close to call”. If Mr Twyman said that, the pound’s movement probably would have been less predictable. But that potential was removed, when Mr Shakespeare told Mr Twyman by phone to make the call for Remain. He urged Mr Twyman to speak with caution.
In the run-up to the referendum, YouGov also sold regular online polls to hedge funds. The data effectively provided these funds with an early indication of what YouGov would publish later. Mr Shakespeare said that this was never his company’s business strategy. He also said all of “our data predicted the same result. There was never any difference between what our clients knew and what the public knew”. He added that any betting strategy based on predicting how public polls might move markets “would be extremely risky”.
‘That’s the game’
Mr Lyons-Lowe, a former hedge fund salesman, started Survation in 2010. The company got its big break in political polling when it was hired by Mr Farage and UKIP after its surveys showed more support for the anti-Europe party than those of more established pollsters.
The organisations grew so close that Survation once based its phone operators in UKIP headquarters and Mr Lyons-Lowe became a friend and key adviser to Mr Farage.
On June 23, the day of the EU referendum, Mr Farage and his team gathered at the London home of a UKIP adviser. Their actions that day have been retold in two books, The Bad Boys of Brexit is an insider account penned by Arron Banks and All Out War: The Full Story of How Brexit Sank Britain’s Political Class, by journalist Tim Shipman. It is based on an interview with Chris Bruni-Lowe, who was Mr Farage’s chief political adviser and was with Mr Farage and Mr Banks on June 23.
The published accounts differ, but both say that Mr Farage had learned the results of an unidentified, financial-services exit poll well before the polls closed at 10pm. These accounts also say that he learned the results before giving his concession statement to Sky.
Mr Farage told Bloomberg that the only external exit poll results he received on June 23 were Survation’s. “He got it right,” Mr Farage said of Mr Lyons-Lowe. “And whoever, whichever clientele, whichever city hedge funds paid him that day, did very well out of it.” Others with knowledge of the results also said that Mr Lyons-Lowe’s hedge fund exit poll accurately called the vote for Leave.
Mr Farage, however, repeatedly told Bloomberg that he learnt the results from Mr Lyons-Lowe’s poll only “minutes after” Sky put his market-moving statement on the air not before.
He then changed his story, saying they came from someone affiliated with Survation’s operation. In a subsequent interview, Mr Farage again changed his story to say Mr Lyons-Lowe intimated that the UK had voted for Leave, but he didn’t share specific data. Mr Farage also said that, at the time, he didn’t believe what Mr Lyons-Lowe had told him.
Mr Farage called his statement to Sky “a terrible mistake”, but he also asserted that he did not give the network’s reporter a true concession. “It was an acceptance that we might not win, but it was hardly, but it was not how—they [Sky] overegged it. They overegged it. But that’s journalism,” he said.
What he could not explain, however, is why he gave a further concession about 70 minutes after the Sky broadcast, which not only echoed the statement aired on Sky, but was more adamant. He made the second concession in an interview with the Press Association, telling them: “I don’t know, but I think Remain will edge it, yes.”
Mr Farage rejected the idea that his concessions were aimed at moving the markets for anyone. But he also laughed about helping to push the pound higher ahead of its crash: “Yeah, and a good thing,” he told Bloomberg, adding that those “who trade short-term markets and lose money shouldn’t complain, because that’s the game. That’s the game.”
Inflating a bubble
The pound offered the simplest play for short sellers looking to profit from the Brexit vote. In this case, another factor also made it easier. As early as January, banks started downgrading their forecasts for the pound to reflect the risk of a Leave vote. JPMorgan Chase lowered its estimate to $1.32. Other banks made similar predictions. The marker helped international financial institutions hedge their risks, but it also gave short sellers a target.
There are many ways to bet on a currency crash, but the main vehicle for many hedge funds is derivatives. Their existence means that funds buying exit polls did not need to get it right. They just needed to be more right than everyone else. Many were, because even exit polls that got it wrong gave underlying data that pointed to pro-Brexit trends.
Pollsters involved in the exit polls say their hedge fund clients had them stream data in regular intervals while voting was underway.
Derivatives allow traders to benefit greatly from market moves with only a small sum on the table. Losses also are amplified. They are priced to reflect the market’s mood, so the Remain sentiment in the polls leading up to the vote, and after Sky’s opening minutes, made short bets cheap. A short seller needs a world of voracious buyers to think he’s the dumb one, for as long as possible. The more unexpected the victory, the bigger the potential profit for the hedge funds.
Pre-election polls published in the British press effectively smoothed the way. In the final four days, YouGov, Survation, ComRes and BMG all published polls showing Remain ahead. None of the pollsters publicly disclosed that they were simultaneously working for hedge funds that stood to make massive profits if the results went the other way.
The effect intensified on the night. The Sky News “exclusives” filled an information vacuum created by the lack of the formal broadcasters’ exit poll. The pound was so buoyed that Bloomberg sent out a chart to financial clients worldwide showing the currency “heading for its best week against the dollar since 2009”. That was at 11.32pm.
Just before midnight, the market got nervous, and the pound dipped below $1.49. Just after midnight, Newcastle reported for Remain, but at a much narrower margin than expected. Anyone holding derivatives before Newcastle who had shorted the pound was already in the money.
At 12.16am, the city of Sunderland dropped a bomb – 61.3 per cent had voted for Leave, instead of the roughly 53 per cent predicted by polling models. The pound plummeted one minute later, hitting $1.43. The pattern repeated over the next five hours.
At 5.28am, the pound bottomed out at $1.32, the mark cited by JPMorgan back in January. However, something was significantly off, according to analysis later compiled by the Swiss Finance Institute. They concluded that there was so much false sentiment for Remain built into the market that night that the pound was at least one hour slower in reaching its bottom than it should have been, and slower than even the dumbest computer model they could create. They attributed this to a herding mentality similar to what happens in a financial bubble.
If public polling up to and on the final day inflated a bubble, there are two ways private polls could have helped traders.
First, commission a private poll that closely tracks what will be released to the public, as in Operation Pomegranate, tipping traders in advance to how the market may move. Second, get better data than the public has, allowing traders to see if the currency is overvalued. Both strategies come with some risk, but because the trader is betting against the prevailing market sentiment, the bet is cheap and the potential payout is high. For traders, it does not matter if the pollster’s ultimate exit-poll prediction is wrong. Hedge funds’ internal models, some far more advanced than anything in the polling industry, fed on raw data, such as turnout in specific regions, that allowed them to make smarter bets. “They are looking for a slight edge – they don’t expect you to be 100 per cent accurate,” said one pollster. Rokos, which had worked with ICM and Curtice, ended up making more than $100m in a single day, according to the results Bloomberg first reported.
While the identity of YouGov’s Operation Pomegranate hedge fund client remains unclear, knowledgeable sources identified two clients. They are Capstone Investment Advisors and Odey Asset Management. Capstone, then managing more than $5.2bn, made about 1.7 per cent of the value of its biggest fund off its Brexit trades. Odey’s eponymous founder is Crispin Odey, who was both a top fundraiser for Mr Farage and a leading contributor of campaign cash to the pro-Brexit side. His firm made about $300m from Brexit.
Mr Odey said his firm did not buy an exit poll on the day. “Everyone is going to try to improve the information they have,” he said of hedge fund surveys. “That’s the arms race.”
Updated: June 25, 2018 07:46 PM