By Simon Kerr, Publisher of Hedge Fund Insight
European equity hedge fund managers have done a very good job this year in both producing absolute returns, and, as importantly, holding on to them in down phases of the market. With the STOXX 600 up 11.86% in 2013, European long/short hedge fund managers are up 8.89% at the hedge fund index level (EuroHedge Index). It has been noted here before* that European based hedge fund managers have done a better job than their American peers given the opportunity set presented by the equity markets (American long/short funds are up 11% this year v the S&P500 up 17.9%).
That relative performance has been noticed by investors in hedge funds. The pattern of flows remained positive for American hedge funds in the middle of 2013 to now, but has been more positive for managers of European hedge funds (and Asian hedge funds too). A year ago no-one outside the EU wanted to take exposure to the political and regulatory risk that the European Union seemed to exemplify. Since then European hedge fund managers have shown that they have the ability tocontrol risk in their portfolios and deliver stock selection alpha amidst a series of threats that were beyond Europe – the threat of tapering, and a political stand-off in the US , and Emerging Market disappointments this year – as well as coping with threats within Europe that are perceived to have lessened by now.
If there has been an under-weighting of exposures to European hedge funds by global investors it is being reversed in the second half of 2013. In particular, American investing institutions are looking to repeat the selection biases they show amongst domestic hedge fund managers when they select equity hedge funds in Europe. Those institutions have marked preferences for fundamentally-driven equity hedge managers with long holding periods. The European managers who fit the profile, with Lansdowne Developed Markets being the archetype, are some way through the active due diligence process with the US endowments, trusts and pension plans who are involved.
Managers, like Theorema Asset Management, who can demonstrate an active and successful shorting process are getting particular attention from investing institutions with capital to allocate within Europe. Theorema also hit one of the current buttons of this group of currently-active buyers in running a UCITS version of their strategy.