Research

2016 Key Trends in European Hedge Funds

Introduction

The European hedge fund industry continues to gain traction among investors despite market turbulence dominating the trading landscape since the start of the year. Investor allocations into the industry stood at US$13.4 billion over the last five months of 2016, up US$4.2 billion compared to allocations over the same period last year. Manoeuvring volatile markets has proved to be a challenge with managers posting year-to-date performance-based losses of US$6.8 billion, compared to gains of US$14.3 billion over the same period last year. Assets under management (AUM) for the European hedge fund industry currently stand at US$541.7 billion as of May 2016 year-to-date, overseen by 3,955 hedge funds.  

The European hedge fund industry had its humble beginnings managing US$38.6 billion, 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.

Figure 1a: Industry growth since 2000
 

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 amid fears over Greece exiting the Euro. Throughout 2012, industry assets stayed at their lows as crisis continued to put a damper on investor confidence. The European Central Bank’s stance to keep interest rates low and support the Eurozone’s recovery has restored market confidence to some extent. Following signs of economic recovery in the region, European hedge funds have enjoyed a period of sustained growth starting in 2013 that has expanded their total asset base to a high of US$496.2 billion in June 2014. Despite seeing six consecutive months of redemptions ending December 2014, the European hedge fund industry AUM grew by US$32.3 billion in 2014.

The European hedge fund industry grew by US$48.4 billion in 2015, largely on the back of investor inflows which accounted for 83% of the mandate’s asset growth in 2015. Nearing the second half of 2016, the region is jolted by the uncertainty over the Brexit referendum which sees Britain separating itself from the EU bloc. Despite volatility in the markets, investor allocations have been a large contributor to the European hedge funds industry, with US$13.4 billion of inflows into the industry. Systematic trend following and relative value strategies continue to see strong interest from investors.

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