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2018 Overview: Key Trends in European Hedge Funds

Introduction

The Eurekahedge European Hedge Fund Index slumped 2.08% as of October 2018 year-to-date, ahead of the underlying equity market as represented by MSCI AC Europe IMI (Local) which declined 7.19% over the same period. The region’s equity markets have suffered from the pressure exerted by various political concerns in Italy and the United Kingdom. Unrealistic election promises by the Italian government led to a 2019 budgetary plan which was contradictory to their pledge of cutting down their debt, prompting criticism at Brussels. Escalating concerns regarding Italy’s budget crisis drove the 10-year government bond yield up to 3.8%, resulting in the highest level of Italy-Germany 10-year bond spread since 2013. Over in the UK, uncertainty continued to loom over Brexit negotiations as the country’s parliament were divided over the deal Theresa May struck with the EU in mid-November this year, which triggered the departure of key figures from her Brexit cabinet.

Figure 1: Industry growth in recent years
 

The European hedge fund industry assets under management (AUM) stood at US$530.3 billion as of October 2018, down US$25.5 billion from the end of 2017 figure, owing to substantial redemptions that started in second quarter of the year. Strong investor allocations totalling US$31.7 billion in 2017 signified a recovery of confidence in the industry following the massive redemptions totalling US$27.0 billion in the preceding year. On the other hand, fund population within the region is on track to contract for the fourth consecutive year, as hedge fund managers face numerous challenges from increasingly strict and expensive regulatory compliance to competition from other alternative investment vehicles. As of October 2018, the European hedge fund industry population stood at 3,753 hedge funds, down from 3,787 by the end of 2017.

The European hedge fund industry assets grew at an impressive rate during the period preceding the global financial crisis in 2008. By the end of 2007, industry AUM stood at US$464.3 billion following seven consecutive years of double-digit annual growth since the end of 2000. The performance-driven losses and investor redemptions during the financial crisis decimated the European hedge fund industry assets, and it wasn’t until 2014 that the industry AUM recovered to levels seen before the 2008 crisis due to the economic slowdown inflicted by the European debt crisis which escalated in 2011.

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