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On 5 August 2019, stocks plunged on Wall Street as the   Whilst equity markets experienced strong growth through
                                                                                                         Dow Jones Industrial Average sank by more than 766   the first quarter of 2019, hedge funds were slow to re
                                                                                                         points (2.9%) – its worst trading day of the year – and the   deploy capital, both on the long and on the short side.
                                                                                                         S&P 500 and Nasdaq both fell 3% and 3.4% respectively   This conservatism prevailed through the first quarter of
                                                                                                         amid fears that the trade war was intensifying. London   the year, with uncertainty relating to a number of key
                                                                                                         listed shares on the FTSE 100 fell by circa 180 points,   macro factors including global trade wars, Brexit and
                                                                                                         almost 2.5% following steep losses on Asian markets,   central bank policy; all negatively impacting investment
                                                                                                         again reflecting the global uncertainties around the future   conviction. As a result, hedge fund leverage levels and
                                                                                                         direction of trading relations between the world’s largest   gross equity market exposures remained suppressed.
                                                                                                         two economies.                              Whilst reports suggest this improved modestly in
                                                                                                                                                     the second quarter of the year, strong equity market
                                                                                                         Closer to home, the risks associated with the way in   performance meant  hedge funds  typically  looked to
                                                                                                         which the UK will leave the European Union (EU) have   maintain a net long bias, which negatively impacted
                                                                                                         intensified.  In  recent  weeks,  the  change  of  UK  Prime   global securities lending volumes.
                                                                                                         Minister has led to a very different stance from the UK.
                                                                                                         Although it remains to be seen as to how this plays out   Not surprisingly, the combination of some very challenging
                                                                                                         in terms of the separation from the EU, in the short-term   geo-political  and  increasingly  difficult  economic
                                                                                                         markets  are  pricing  further  uncertainty,  with  sterling   headwinds have begun to come through in bottom line
                                                                                                         trading at all-time lows in the currency markets.  performance across our industry. Data published recently
                                                                                                                                                     by IHS Markit suggested that global revenues from
                                                                                                         A constant theme that we saw in 2018 and into 2019, was   securities lending for the first six months of 2019, down
                                                                                                         one of uncertainty which not unexpectantly has led to   some 15% at €4.5 billion, compared to the same period
                                                                                                         varied investor sentiments, and at times inactivity. Ahead   last year. Revenue streams still come predominantly from
                                                                                                         of the year end, we saw significant de-risking by hedge   equities securities lending, which represent circa 80% of
                                                                                                         funds which was precipitated by a rise in equity market   gross revenues globally. Conversely and notwithstanding
                                                                                                         volatility, and meant that most hedge funds started 2019   the high volumes of government bonds being lent today,
                                                                                                         in a risk-off or neutral position.          they only account for 15% of global revenues.

                                                                                                          Fig x - ISLA Securities Lending Aggregate
                                                                                                          Fig 1 - ISLA Global Securities Lending Aggregate

      Global Market Dynamics

      Many of the factors that created the geo-political and   After strong growth in 2017 and early 2018, global
      economic backdrop to the first six months of 2019, were   economic activity slowed in the second half of last
      very familiar to those observers who had watched events   year, reflecting a confluence of factors affecting major   EUR
      unfold in 2018.                             economies. China’s growth declined following a
                                                  combination of needed regulatory tightening to rein in
      As these factors played out more broadly into financial   shadow banking, and an increase in trade tensions with
      markets, we saw knock-on effects into areas of investment   the United States. These trade tensions have, if anything,
      management and in the provision of market liquidity, both   increased in the past few weeks, and at the time of
      linking directly to the demand to borrow securities. This in   writing,  financial  markets  around  the  world  have  seen   €0
      turn changed some of the economics around our markets,   sharp falls amid growing fears that the US-China trade   Dec 2015  Jun 2015  Dec 2016  Jun 2016  Dec 2017  Jun 2017  Dec 2018  Jun 2018  Dec 2019  Jun 2019
      leading to a depressed revenue picture for the first half of   dispute could escalate into a full-scale currency war, with
                                                                                                            *see Data Methodolgies for full details                              Source: ISLA
      the year. More on this later.               damaging consequences for the world economy.

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