Patriotic bias: City hedge fund managers believe UK stocks are most successful, but are they?
A staggering 96 per cent of UK hedge fund managers think that UK stocks are more successful compared to other markets – and as such is where much of their investments can be found.
However, when looking into worldwide stocks, this patriotic inclination may be holding hedge fund portfolio managers back from investing in stocks that could see higher potential returns, according to a new survey shared with City PM today.
The research, focusing on hedge fund portfolio managers, was conducted by broker IG Prime to understand the influence patriotic bias has on investment strategy.
Scrutinising data from Trading Economics, the firm found that the top five countries for YoY stock market growth in different continents around the world are:
Europe
- Turkey – 74.60% YoY growth
- Sarajevo – 31.13% YoY growth
- Norway – 25.71% YoY growth
- Czech Republic – 25.09% YoY growth
- Bulgaria – 24.64% YoY growth
Americas
- Argentina – 91.37% YoY growth
- Venezuela – 84.52% YoY growth
- Colombia – 21.59% YoY growth
- Canada – 13.95% YoY growth
- Mexico – 13.26% YoY growth
Asia
- UAE – 66.78% YoY growth
- Vietnam Hanoi – 44.98% YoY growth
- Bahrain – 42.77% YoY growth
- Dubai – 39.34% YoY growth
- Kuwait – 39.21% YoY growth
For comparison, the UK stock markets YoY growth stands at 9.02 per cent, meaning that branching out and making trades in other nations could be a risk, but a risk that could lead to higher potential returns for hedge fund portfolio managers.
The firm surveyed 250 hedge fund portfolio managers and hedge fund traders to understand their diversification strategies, and factors they consider when trading internationally.
Patriotic bias
The data showed that patriotic bias has influenced portfolio asset allocation.
Pre-pandemic, 59 per cent of UK hedge funds stated that they had dedicated between 76–100 per cent of their portfolio to UK investments, whilst 25 per cent dedicated 51–75 per cent, 14 per cent had invested between 26–50 per cent of their funds to UK stock, and 2 per cent had invested just 25 per cent or less.
“Hedge funds have been focused on the markets they know best and are most comfortable trading in,” said Chris Beauchamp, chief market analyst at IG Group.
He told City PM: “Although markets like the US have significantly outpaced the UK, ‘safe’ investments that managers feel more confident will produce a return are likely to be prioritised over ‘riskier’ investments – despite the potential for enhanced profits.”
Investment decisions
Internal and external factors have influenced hedge funds’ investment decisions, with 57 per cent of all respondents citing ‘pressure from management’ and an equal number of respondents noted desire to ‘benefit from other strong performing markets’ as a factor to diversify outside of UK assets.
Hesitancy to diversify has remained, as 46 per cent of all survey respondents noted they felt tentative about trading in international markets due to lack of experience.
Similarly, 46 per cent of all respondents also said they were concerned about the impact of political volatility on the market.
There has been marginal shift towards European stocks since the pandemic began, as the number of hedge funds investing 26-50 per cent of their portfolio to European stocks has increased from 6% pre-pandemic to 8 percent.
UK hedge funds have dedicated marginally less of their portfolios to stocks in both the US and Asia since the pandemic began.
“It’s no surprise that hedge funds would look to mitigate as much risk as possible during a time of crisis, and if lack of knowledge and experience of a certain market is to be deemed a risk then it would appear that this mitigation is a driver of continued ‘patriotic investing’ during the pandemic,” concluded Beauchamp.