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In the Face of Economic Uncertainty, Can PIIGS Find Solace in Hedge Funds? – July 2015

by Jesse Fahy

  • 03 Jul 2015
  • HF

With Greece dominating the recent headlines, the world once again focuses its attention on Portugal, Italy, Ireland, Greece and Spain – the European Union (EU) member states otherwise known as PIIGS. The economic group was first formed following the financial crisis, with their unstable economies raising significant questions about the fate of the Eurozone. While the bailout packages that connected these nations helped them to recover, Greece’s recent struggles shift these same issues back into the spotlight. This blog will examine the make-up of investors based in PIIGS.

According to Preqin’s Hedge Fund Investor Profiles, investors based in the PIIGS countries account for 18% of the aggregate assets under management (AUM) of EU-based firms that invest in hedge funds. Of these investors, over half are either funds of hedge funds (26%), private sector pension funds (14%) or foundations (13%), as shown in the chart below. Hedge fund investors based in PIIGS have a mean allocation to hedge funds of $408mn.

In terms of investor preferences, the majority (85%) of PIIGS-based investors seek global hedge fund exposure with their investments. This is followed closely by those seeking exposure to Europe (63%) and subsequently North America (30%). PIIGS-based investors show a slightly reduced appetite for emerging centres for hedge fund investment than their wider EU counterparts: 22% have a preference for emerging markets, compared with 26% for all other EU-based investors. In addition, 14% of PIIGS-based investors have a preference for Asia-Pacific-focused hedge funds, compared with 20% across the rest of the EU investor base.

PIIGS-based investors, however, share similarities with other EU-based investors when looking at the most common hedge fund strategies for investment. Long/short equity, macro, multi-strategy and managed futures/CTA are the four most common hedge fund strategies invested in by both EU- and PIIGS-based investors. Although they share the same leading preferences for funds, there are some differences in the strategies targeted by investors based in PIIGS and the rest of the EU. PIIGS-based investors have a notably smaller appetite for credit strategies; distressed funds are sought by 9% fewer investors in PIIGS states than in the rest of the EU; fixed income six percentage points fewer; and long/short credit and specialist credit are both utilized by five percentage points fewer investors in PIIGS than in the wider EU investor universe.

The recent troubles in Greece and the potential ‘Grexit’ in the coming days highlights the depth of the problems these nations have faced. Whatever may happen, it is clear to see that alternatives, and in particular hedge funds, will play a significant role in protecting these investors’ capital.

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