NICK EVANS, EDITOR, EUROHEDGE
If, as many people suspect, 2012 could prove to be a
make-or-break year for hedge funds in Europe after the problems
of the past few years, then the jury is still firmly out as to
which way the verdict will go.
The evidence is decidedly mixed. Performance has been
patchy, overall industry growth is weak, institutionalisation
continues to drive ever-greater asset concentration and new
fund launches have fallen to the lowest levels on record.
And yet the quality of the new funds coming through in
Europe is higher than ever, investors remain keen to allocate
to hedge funds (both established and emerging), the shutdown
rate has returned to pre-crisis levels after its post-crash
spike and there is a growing belief that Europe will –
at some point – present extraordinary investment
Two thirds of the way into a year where the market, macro
and regulatory environment has again provided a very unsettled
backdrop for most strategies, European hedge funds are at least
holding their heads above water in terms of overall
To the end of July, the EuroHedge Composite Index was up by
2.14% on a median basis and just over 2.5% on a mean average
basis – with credit and convertible arbitrage the best
performing strategies, with average returns of 7% and 6%,
Most funds have done a reasonable, if not brilliant, job of
combining return generation with downside protection in
conditions that remain very testing – with the
eurozone crisis acting as a permanent source of uncertainty and
And there have been many strong individual performances,
with several funds notching up some eye-catching returns in
long/short equity, macro, credit, fixed-income, event-driven,
multi-strategy, convertibles, managed futures, FX and
But the first half was a game of two quarters –
with markets becoming increasingly tricky in Q2 after a buoyant
start to 2012. And the pressure on managers is still intense to
deliver genuine alpha and robust risk-adjusted returns at a
time when many investors are starting to question their whole
attitude towards hedge funds after the disappointments of 2008
and 2011 – and in markets that continue to veer
sharply from risk-on to risk-off.
So far, the numbers suggest that investors are broadly
keeping faith with their hedge fund investments – with
redemptions and outflows running at subdued levels, although
they have shown signs of starting to tick up through the summer
OVERALL ASSETS REMAIN STRONG
Given the overall negative performance last year, it was
impressive that overall assets in European hedge funds remained
as strong as they did in 2011 – rising a little to
$425 billion by the start of this year.
New money is still coming into the industry generally
– particularly into managed futures and macro
strategies – and there is growing interest from global
investors (notably in the US) in the opportunities that the
European crisis will create, especially in distressed credit
but also in equity-related strategies.
But there is also growing evidence that some other investors
are starting to call time on hedge funds, or at least cut back
their commitments, after several years of disappointing returns
and unfulfilled expectations.
The rising correlation of hedge fund performance with
underlying markets has led some clients to query whether
managers are delivering the portfolio diversification they
need. Conversely, the high level of performance dispersion
within specific strategy areas has highlighted the difficulty
in picking individual managers.
The dispersion so far again this year between the best and
worst performing funds is striking: from +25% to -10% in
European long/short; from +30% to -15% in global equity; from
+25% to -15% in global macro; from +20% to -15% in managed
futures; and from +15% to -20% again in event-driven.
Further adding to the air of uncertainty overshadowing the
industry in Europe is the raft of new regulatory and compliance
requirements coming down the line – which will impose
a whole new layer of cost and administrative hassle to managers
and investors (and service providers too).
All this macro, market and regulatory uncertainty is clearly
acting as a severe restraint on new fund launch activity
– which has now fallen to its lowest level in Europe
in more than a decade.
Just 37 new hedge funds launched in the first half of the
year, raising $3.6 billion – a massive drop from the
peak years of 2004 to 2008, when well over 100 new funds were
launched in the first half every year.
QUALITY NOT QUANTITY
Despite the plunge in quantity, the quality of the new European
funds coming through is exceptionally high – both in
terms of the investment pedigree of the principals and (as
importantly) the strength of the supporting business
Bank prop trading spin-outs continue to be a major source of
the new entrants, together with a growing number of experienced
'second generation’ managers from leading hedge
fund firms who are launching their own operations.
And, although the bar for new funds rises ever higher in
line with the institutionalisation of the industry, there is
also more money available for seeding and early-stage
investment than ever before – and from an increasingly
diverse range of providers.
Dedicated seeders, family offices, funds of funds, banks,
private equity groups, insurers and even pension funds and
other institutional investors themselves are all increasingly
keen to back some of the new generation of hedge funds that
could well be the stars of tomorrow.
The pipeline for new hedge fund launches in the rest of the
year looks strong. And arguably there has never been a time
when new blood is needed more urgently in the industry than it
But managers, whether established or emerging, need to
deliver. Investors are getting restless and they need results.
Just as in Europe as a whole, where the crisis could just as
easily develop into either a full-blown catastrophe or a golden
opportunity, so the European hedge fund industry could be at an
inflection point too. And its prospects over the next few years
may depend largely on its performance over the next few