Research

2016 Overview: Key Trends in European Hedge Funds

Introduction

European hedge fund managers have had a challenging year in 2016, with redemption activity picking up for the past six consecutive months. Year-to-date investor redemptions stood at US$7.4 billion as of October 2016, a stark contrast from stronger investor allocations totalling US$32.4 billion over the same period last year. Indeed, trading conditions in 2016 proved to be difficult as performance-based figures also took a hit, with year-to-date losses of US$3.3 billion. Assets under management (AUM) for the European hedge fund industry currently stands at US$524.5 billion as of October 2016 year-to-date, and is overseen by 3,949 hedge funds.

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.

Figure 1a: Industry growth since 2000

  European hedge fund industry growth 2000 to October 2016

 

By the end of 2011, the AUM of the European hedge fund industry declined to a US$359.8 billion low, 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.

In 2015, the industry expanded by US$48.4 billion, largely on the back of investor inflows which accounted for 83% of the mandate’s asset growth during the year. In the second half of 2016, the region is jolted by the uncertainty over the ‘Brexit’ referendum, unnerving investors and in the process, this led to steep redemptions in 2H 2016. The European hedge fund industry contracted US$10.6 billion as of October 2016, the industry’s steepest year-to-date asset decline since 2012.

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