Research

The first edition of the Eurekahedge European Hedge Fund Directory contains information on more than 500 single manager hedge funds that conform to the arbitrary definition of either:

• The manager physically located in Europe (irrespective of geographic execution of strategy);
• Or the manager is physically located outside of Europe but the strategy is executed in Europe

Funds by Strategy

As shown in figure 1 the most popular strategy for European hedge funds is Long/Short Equities with nearly half (44%) of managers executing this strategy. Tying for second and significantly behind, are CTA/Managed Futures and Relative Value/Market Neutral at 12% each. This conforms to the general breakdown of hedge fund strategies worldwide; though CTA/Managed Futures command a slightly greater market share in Europe than the U.S. or Asia.

Fixed Income (including Debt), Macro, Event Driven, Multi-Strategy and Convertible Arbitrage each share roughly equal market share, approximately 5%. Assets dedicated to arbitrage strategies have decreased slightly over the past year due to a lag in performance and the flow into superior performing CTAs and Managed Futures funds. The funds are split by strategy as shown in Fig 1.

Figure 1: Funds by Strategy

Funds by Geographical Location of the Manager
By Region

The majority of European hedge fund managers are based in Europe - nine of out ten managers are physically based in Europe. The remaining managers are located primarily in the Americas. Table 1 shows the geographical location of managers.

Table 1: Geographical Location of Hedge Fund Managers

Of those based in Europe, the vast majority are in The British Isles (comprising of United Kingdom, Channel Islands, and Republic of Ireland). France has the next highest concentration of single manager hedge funds, followed by Switzerland and the Nordic Region. For lifestyle reasons, it is unusual for the fund manager to be based in the location where the fund is domiciled.

Figure 2: Geographical Location of Managers within Europe

London is home to one of the largest concentration of hedge fund investors in the world. That, coupled with the availability of talent coming from The City, the ease to visit companies or travelling management teams and a supportive regulatory environment makes it the ideal location for a hedge fund.

Funds by Region where Strategy is Executed

Over 80% of managers execute either a global strategy or a European exclusive strategy. Asia (Japan, South Korea, Hong Kong, Singapore and Australasia) is the third most popular strategy focus (10%), followed by Emerging Markets (5%) and The Americas (3%). The split by region where strategy is executed is shown in Figure 3.

Figure 3: Funds by Region

Average Asset Size, by Geographical Location of Manager

Figure 4 indicates there is a wide spread in average size of assets under management by single manager hedge funds per specific country - ranging from over $35B for United Kingdom to sub $100M for Austria. With most of the money invested in European hedge funds coming from Europe, the managers that are closest to investors (ie London, Paris and Geneva) raise the most assets. This makes sense in a time when investors are under pressure to meet frequently and closely monitor their managers for potential style drift or blow-ups.

It is interesting to see that Ireland, long associated with the back office, has a significant amount of capital under management in hedge funds. Like Singapore for Asian hedge fund managers, this may have to do with "life-style" developments - managers, specifically ones with a family, coming from institutional backgrounds have grown tired of working in The City of London and prefer a quieter working environment.

Figure 4: Total Asset Size by Geographical Location of Manager

Service Providers
Administrators

The Administrator market for European hedge funds is both fragmented and consolidated. The actual number of different Administrators used is high at 56, making the supplier base quite fragmented. However, the top 5 Administrators control nearly half the market share (based on number of funds).

We believe that consolidation is inevitable amongst Administrators. While the business has become commoditised, some firms are attacking in a three-pronged fashion. First, they are building their brand to gain greater recognition and reputation amongst hedge funds; second, they generate efficiencies and savings through economies of scale and scope; finally, they expand into more profitable parts of the hedge fund service value chain (like custodianship and seeding).

There is a need for niche players, but they must offer a compelling value proposition to hedge funds to justify their higher premiums.

Prime Brokers

Market share is extremely concentrated with two Prime Brokers controlling approximately half the market (based on number of funds). The actual number of different Prime Brokers used by European hedge funds is 27. In some cases, one hedge fund will engage more than one Prime Broker.

We believe that the competition will steadily gain market share from the "Big Two." We expect to see new entrants as Investment Banks and others look for a slice of this profitable pie.

Structure
Domicile and Listing

Unsurprisingly, most hedge funds are domiciled in the Cayman Islands. From Table 2 we see that well over half of European hedge funds are domiciled there; which is consistent with North American and Asian strategy hedge funds. This is followed by Ireland, Bermuda and British Virgin Islands.

Table 2: European Hedge Fund Domicile - Top 4 Countries

Among European hedge funds, about 60% are listed on an exchange. Due to the ease of listing on the Irish Stock Exchange, it is the market leader with 86% of qualifying funds listing there. There is no meaningful second.

Hurdle Rate and High Water Mark

The existence of hurdle rates and high water marks are perceived by many investors as being synonymous with hedge funds.

However, about three-quarters of European hedge funds do not have a hurdle rate. Clearly, most fund managers believe they are entitled to a cut of any positive return they generate. And the investors are compliant.

For the high water mark, it's a different matter; with about 90% of funds having a high water mark.