With the creation of the Alternative Investments Fund Managers Directive (AIFMD) in 2011, alternative investment funds operating in Europe have seen more rules and financial regulations put in place than in past years. The AIFMD was established in order to create more transparency with fund managers, and to serve as a regulatory system to heavily monitor European investments following the economic downturn of 2008. With these relatively new regulations in Europe, investors throughout the continent have found it more difficult to invest in hedge funds globally. Despite the AIFMD, some European Union (EU)-based investors have successfully allocated capital to US-based hedge funds.
The AIFMD heavily monitors alternative funds operating in Europe, making fundraising in Europe more difficult for US-based hedge funds. New regulations force non-EU-based managers to undergo the complex and expensive process of either getting their own AIFMD passport, engaging a European management company (ManCo) to oversee their risk or portfolio management, or attempting the difficult and restrictive feat of reverse solicitation.
Despite the barriers, there have been some EU-based investors that have found success investing in hedge funds across the pond. Preqin’s Hedge Fund Investor Profiles database shows that 34% of EU-based investors tracked by Preqin seek hedge fund exposure in North America. Preqin’s database tracks 3,180 hedge funds that invest regionally in North America, only 7% of which are based in the EU. Eighty-one percent of all hedge funds investing in North America are US-based, with Canada representing a healthy 5% of the total. If an EU-based investor was to only look locally for hedge funds investing in North America, they would be missing out on 93% of their available options, which is not optimal for a portfolio manager seeking the best possible investment for their institution’s goals.
UK-based public pension fund London Borough of Barking & Dagenham Pension Fund is a primary example of an EU-based institutional investor seeking investments in US-based hedge funds. The £740mn pension fund recently allocated £43mn to seven new hedge funds, including two (Field Street Capital Management and Renaissance Technologies) in the US. This investment of almost 6% of their capital in new hedge funds shows a strong preference for the asset class, despite its now heavily regulated structure, and also indicates that investors will look outside their own economic regions to build their optimal portfolio.
EU-based investors seeking to allocate to US-based hedge funds give themselves the opportunity to invest in a broader range of funds to which they would not otherwise have access. Many EU-based investors are still considering investment across the pond, demonstrating that there is motivation for US-based hedge funds to fundraise in Europe, despite the heightened regulatory environment.