European Hedge Fund Industry Joins In The Growth

By Simon Kerr, Hedge Fund Insight

From immaturity around 1997 through the mid 2000’s the European hedge fund industry grew faster than that of the country which invented the concept, the United States of America. For the period since the Credit Crunch the European industry has been a lot less vigorous than the American scene, for a number of reasons that have been rehearsed on “Hedge Fund Insight” before.  Over the last three years the Euro Crisis has given investors beyond Europe a good reason not to get involved, and they have not been. Until now.

In 2011 and 2012 capital flows into European hedge funds were flat or negative, and such flows as there were concentrated in even fewer funds than in America – amongst the obvious beneficiaries were Blue Crest, Capula and Cantab. But 2013 has started differently from the previous risk on-risk off years, and risk appetite has grown much more consistently this year on the back of very positive returns from equity markets, themselves a function of QE III. Each of the first four months of the year have given European hedge funds net positive flows in aggregate, adding up to net inflows of $12.4bn, according to Eurekahedge.

Most of the capital raised has gone into UCITS versions of the funds rather than the offshore versions of European hedge funds.   This bias to UCITS versions of hedge funds is despite the comments from investors that the they are struggling to achieve diversity in their (hedge fund) UCITS portfolios because of the limited range of hedge fund strategies available in the fully regulated funds. The slightly fearful inference is that investors would sooner jam capital into a lesser performing but regulated versions of successful funds than take the extremely minor risk of investing in the offshore version of brand name funds.

It is highly likely that there is an equity thing going on. Equity markets have commanded attention this year, whether it is the Nikkei or the S&P500. Investors in hedge funds who did not follow the instinct of the leadership of Henderson Investors, who advised their clients to get more equity orientated in the 4Q of last year, will have experienced regret after some record returns from equities in the 1Q of 2013.

Equity long/short hedge funds are a good way of getting some equity exposure, but in a moderated way. For an investor who fears that the moderating of growth outside the United States will impact equity returns in the second half of 2013 increasing equity long short is a safe allocation.  That the emotional indicator still flicks momentarily to fear even when investors are in the greed zone, is shown by the growing interest in sector equity funds. Although there are long-biased sector funds there are many that are market neutral or are constrained to limited net market exposure. Investor interest in sector funds suggests we are not in blanket bullish territory yet. Both Asian hedge funds and American hedge funds took in new investor capital last year. The newly expressed appetite for European hedge funds – they received the biggest allocations of any geography in April – is a welcome sign of risk appetite spreading, even if does not extend to all hedge fund strategies and fund sizes as yet.