European hedge funds come back

By Nick Evans

European hedge fund assets fell sharply after the financial crisis of 2008, but the industry is finally getting its mojo back. Thanks to a combination of solid performance and increased investment into these funds, total hedge fund assets in Europe have jumped 11% over the past year, climbing to $423 billion at the end of 2010 from $382 billion at the end of 2009—the first year-on-year increase in assets since 2007, according to the latest EuroHedge survey of European hedge fund assets.

Virtually all of that gain came in the second half of the year, in part because of performance gains during that period. The EuroHedge Composite median index gained 6.32% in 2010 after being flat for the first six months of the year, showing a narrow gain of 0.12% to the end of June.

Although the European hedge fund industry is still a long way from its all-time high of $575 billion at the end of 2007, it is roughly equal to where it was in mid- to late 2006. European hedge fund assets bottomed out at $350 billion in mid-2009, a drop of 39% from their peak. Another indicator of the fast-recovering appetite for hedge fund and absolute return investment strategies is that last year investors poured $70 billion into so-called UCITS-compliant strategies, which are similar to hedgelike mutual funds in the United States. Taken together, the assets figure rises to almost $500 billion, not far from the peak in 2007.

But the new money appears to have gone mostly to the biggest brand-name hedge fund firms, a trend mirrored in the U.S., as AR’s recent Billion Dollar Club survey of U.S. hedge fund assets also showed. These blue-chip firms have enjoyed asset growth far ahead of the industry average, as investors have sought the perceived safety of the best-known names at a time of high uncertainty and risk.

Man Group is the largest European hedge fund firm, thanks to its landmark merger with asset manager GLG last year. The firms had combined hedge fund assets of $32.8 billion at the end of 2010—accounting for nearly 8% of the total assets in the European industry. The top 17 firms in Europe now have assets of more than $5 billion each, collectively accounting for roughly 50% of the industry in Europe.

BlueCrest Capital Management, one of the best hedge fund performers globally during the past three years, grew its assets to almost $25 billion at the end of 2010, a remarkable increase of more than 46% from its total at the end of 2009. The firm’s BlueTrend systematic trading strategy, managed by Leda Braga, gained almost 16% last year. Its BlueCrest Capital International strategy, run by BlueCrest co-founder Mike Platt, returned 12.8% over the same period.

Brummer & Partners, a hedge fund firm in Stockholm and one of the industry’s top-performing multistrategy groups in recent years, grew its assets by more than 50% from $7.6 billion at the end of 2009 to $11.5 billion at the end of 2010 as it continued to expand its multifund platform and attract assets from an increasingly international and diversified investor base. The firm’s fixed income–focused Nektar fund gained 16.1% last year.

Winton Capital Management, the systematic CTA hedge fund group founded by David Harding, enjoyed a 40% rise in assets during 2010 and now manages $17.2 billion, up from $12.3 billion at the start of the year. The firm’s Winton Futures Fund gained about 14.5% in 2010.

And Yan Huo’s highly regarded Capula Investment Management fixed-income and macro group grew its assets by 90% over the past year, now managing $7.3 billion, up from $3.9 billion at the end of 2009. Its Capula Global Relative Value fund returned 9.6% in 2010 and has produced an annualized return of about 13%. Goldman Sachs’ Petershill Fund, which buys stakes in hedge funds, owns a chunk of Capula, and the Wisconsin state pension fund announced in February that it is allocating $100 million to Capula. It is the pension’s first hedge fund investment.

The trend of institutional investors pouring money into the bigger firms has also been evident at firms that did not perform particularly well in 2010, highlighting the extent to which these investors are attracted by factors other than performance, including size, scale and stability. Despite flat performance in 2010, Brevan Howard Asset Management still grew by 14% during the year from $25.3 billion at the end of 2009 to $28.9 billion, although the bulk of that growth took place in the first half of the year. As with all the other groups, these figures represent only the firm’s assets in European hedge fund strategies and exclude those in funds run from other parts of the world, such as the U.S. or Asia.

At the other end of the scale, many well-performing hedge fund boutiques have struggled to raise assets in such a safety-first environment. But there is increasing evidence that investors are starting to move down the size scale in search of returns, with many smaller funds reporting a significant pickup in assets and interest in the past few weeks.

And a number of fairly recent entrants have already succeeded in establishing themselves among the industry’s largest players. These include former Moore Capital commodities trader Christian Levett’s Clive Capital (with assets of some $4.6 billion), ex-Egerton Capital long/short European equity manager Nicolai Tangen’s AKO Capital ($4 billion), former Deutsche Bank prop trader Nick Niell’s multistrategy Arrowgrass Capital Partners group ($3.5 billion), ex-Moore credit star Tim Leslie’s James Caird Asset Management ($2.5 billion), and Lombard Odier’s 1798 Global Partners hedge fund affiliate, led by Aziz Nahas ($2.5 billion).

Still, these are the exceptions rather than the rule. The vast majority of European hedge fund groups—like their counterparts in other parts of the world—are still running assets well below their levels before the crash and have a long way left to climb to get back to parity.

Managed futures is now comfortably the largest strategy in terms of assets in Europe, with assets of $83.5 billion at the end of 2010, a 24% increase over the previous year. That strategy now accounts for almost 20% of the total industry, compared with the $68 billion managed by European equity funds, which now account for just over 16% of the industry.

Macro funds also enjoyed a big gain in assets, climbing to $57.4 billion at the end of 2010 from $47.9 billion at the start of the year, a year-on-year increase of almost 20%. This is partly because of investors’ thirst for liquid and transparent strategies, and also because of a renewed appetite for traditional global macro trading strategies at a time of such high macroeconomic uncertainty and volatility.

Multistrategy and mixed arbitrage was also up heavily on the year, gaining 32%, to take assets to $44.3 billion (up from $33.6 billion at the start of the year). Assets in equity market neutral and quant strategies grew by 22% to $13.1 billion by the end of the year, from $10.7 billion at the beginning of 2010.

Surprisingly, overall assets in event-driven remained fairly flat on the year, despite some big new arrivals during the past year or so, such as ex-Deephaven Capital Management manager Tony Chedraoui’s Tyrus Capital and former Goldman Sachs principal strategies head Pierre-Henri Flamand’s Edoma Capital. But areas like commodities, credit and emerging-market debt also grew and are continuing to attract increased interest from investors and generate strong performance.

With the climate for new fund launches looking better than it has in years and with new investment into hedge funds continuing to gather steam, the industry looks set for continued growth and revival in 2011, despite the uncertainty and volatility in world markets. And there is no evidence that the UK is losing its grip on the European industry, despite potential new regulations and persistent rumors about a mass exodus from London to such tax-friendly domiciles as Geneva or Zurich.

Even excluding the $25 billion managed by BlueCrest, which has been formally incorporated in the Channel Islands, and with its managers operating from London and Geneva, the UK still accounts for almost 70% of European industry assets. The figure for Switzerland is 4.8%.