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Key Trends in European Hedge Funds (May 2022)

The Eurekahedge European Hedge Fund Index was down -4.04% as of March 2022 year-to-date, outperforming the Euro Stoxx 50 which declined -9.21% over the same period. European equity markets suffered sharp declines over the first three months of 2022 as the escalating Russia-Ukraine conflict elicited severe economic sanctions on Russia from the US and their allies in a bid to cripple the Russian economy and war effort. The Russian economy has been devastated by the crippling sanctions, with half of the Russian central bank’s US$640 billion in reserves frozen and foreign companies operating in Russia shutting down their operations, leading to rising unemployment and economic hardship. The conflict has led to a surge in commodity prices, with the S&P Goldman Sachs Commodity Index up 33.13% over the first three months of 2022, driven mainly by the sharp rise in energy and crude oil prices. Eurozone inflation rose to an all-time high of 7.5% in March, more than triple the European Central Bank’s 2% inflation target. In a bid to cool the rising inflationary pressure, the European Central Bank shifted to a tighter monetary policy stance by tapering asset purchases at a faster rate and signalling a possibility for the first interest rate rise later this year. UK equities was the most resilient among its European peers as the FTSE 100 gained 1.78% over the first three months of 2022. By contrast, the RTS Stock Index, DAX Index and CAC 40 Index declined -36.00%, -9.25% and -6.89% respectively over the same period.

In 2020, the onset of the COVID-19 pandemic wrecked investors’ confidence, causing a staggering US$55.2 billion AUM decline in Q1 2020 as the European hedge fund industry recorded US$30.0 billion of performance-based losses and US$25.2 billion of net investor outflows over the first quarter of 2020. The European hedge fund industry managed to stage a rebound over the subsequent nine months to end the year with an AUM of US$463.4 billion, recording US$48.4 billion of AUM growth attributed to US$41.2 billion of performance-based growth and US$7.3 billion of net investor inflows. This positive momentum persisted into 2021, as the European hedge fund industry recorded performance-based gains of US$24.7 billion and net investor inflows of US$19.8 billion, boosting industry AUM to US$507.9 billion by the end of 2021. Investor risk sentiment was supported by the accelerating vaccination programme and strong fiscal and monetary policy support provided by European governments and central banks. The positive momentum was reversed going into 2022 as the outbreak of war between Russia and Ukraine led to concerns over stagflation. As of March 2022, the European hedge fund industry AUM has declined by US$9.6 billion and currently stands at US$498.3 billion, attributed to US$4.2 billion of performance-based losses and US$5.4 billion of net investor outflows.

Figure 1: Industry growth in recent years

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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