Introduction
The European hedge fund industry has been gaining since the start of the year despite political uncertainty in the Eurozone area. Investor allocations into the industry stood at US$3.5 billion over the first five months of 2017, though the first two months of the year show investors’ redemptions to the tune of US$2.8 billion as concern arose over the outcome of the French presidential election results. Over the last year, investor redemptions stood at US$27.0 billion, a stark contrast from stronger investor allocations totalling US$40.5 billion in 2015. Indeed, trading conditions in 2016 proved to be difficult with performance-based figures also taking a hit, with losses of US$2.3 billion. Assets under management (AUM) for the European hedge fund industry currently stand at US$516.4 billion as of May 2017 year-to-date, overseen by 3,901 hedge funds.
With expectations of rising rates in the US, continued political deadlock over Trump’s fiscal stimulus and a tech-sector led equity market rally in the US appearing to gain some grounding. The second half of the year could see a re-positioning in terms of regional exposures, possibly a pullback in the US markets tilt for globally mandated hedge funds. This could favour emerging market (EM) assets where valuations are relatively cheap especially given a weakening USD which adds further to the appeal for EM assets. Europe could be another favoured region as underlying equity markets look cheap relative to the US, but a rising Euro could put a damper on underlying earnings for European companies and subsequently on valuations. So far, the trend in investor flows into hedge funds has favoured European mandates, Eurekahedge data reveals and it remains to be seen how this plays out in the second half of 2017.
Figure 1a: Industry growth since 2000
The European hedge fund industry had its beginnings managing US$38.6 billion in assets, overseen by 470 hedge funds in the year 2000. The industry’s AUM saw tremendous growth over the next seven years, with AUM peaking at US$472.8 billion by October 2007. However, the global financial crisis and the subsequent sovereign debt crisis dealt a serious blow to the industry as managers faced redemption pressure from investors and heavy performance-based losses. AUM declined by roughly 30% in the financial crisis year in 2008, compared to the industry’s high in the previous year.
By the end of 2011, the AUM of the European hedge fund industry declined to a low of US$359.8 billion, following a resurgence of debt woes in member EU sovereigns as the crisis intensified amidst fears over Greece exiting the Euro. Throughout 2012, industry assets stayed at their lows as crisis continued to put a damper on investor confidence.
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