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Fund of Hedge Funds Managers in Europe Outperform US Counterparts Despite Closures - September 2015

by Jack Ebbs

  • 02 Sep 2015
  • HF

Europe-based fund of hedge funds managers (excluding funds of CTAs) have enjoyed positive performance over H1 2015, posting returns of 4.02%, significantly outperforming both the Preqin All-Strategies Hedge Funds benchmark and US-based fund of hedge funds managers, which posted returns of 3.81% and 2.93% respectively. Diversification within their portfolios is of paramount importance to investors and their faith in funds of hedge funds is currently being rewarded. Europe-based managers have not managed to post a greater year-end return than their US counterparts since before the financial crisis, but have set themselves in good stead to achieve just that in 2015.

Preqin’s Hedge Fund Analyst currently tracks 2,194 fund of hedge funds vehicles controlled by 721 fund of hedge funds managers. North America leads the fund of hedge funds marketplace, accounting for 404 managers, compared with 213 Europe-based firms. The fund of hedge funds industry has seen some significant consolidation over the past 18 months with a high number of firm closures – particularly in Europe where managers have often struggled to navigate the volatile macroeconomic environment in the eurozone.

Since January 2014, there have been 54 known cases where fund of hedge funds managers have ceased trading and/or closed down operations. The chart below shows that the majority of these closures have taken place in Europe, representing 52% of all known closures. North America- and Asia-Pacific-based firms account for 39% and 9% respectively. Indeed, the performance of Europe-based fund of hedge funds managers this year appears all the more impressive when set against the backdrop of closures. In addition, Europe-based managers offer less volatility to investors: a three- and five-year volatility of 2.67% and 3.24%, compared with US-based managers’ 3.42% and 4.14% respectively.

Fund of hedge funds managers have justified charging double layers of fees by outperforming the Preqin overall hedge fund benchmark, thus highlighting their importance by offering investors a risk-adjusted, uncorrelated and diversified alternative to single-manager hedge fund managers. Europe-based fund of hedge funds managers have reason to be optimistic as we see out the rest of 2015. Despite a volatile investment environment within the region, fund of hedge funds vehicles have still managed to produce positive returns. It remains to be seen if they can maintain this level of outperformance and, in particular, whether they can finally achieve a greater year-end return than their US peers in 2015.

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