US Investment an Important Source of Capital for Europe-Based Hedge Funds – July 2014

by Joseph Lee

  • 17 Jul 2014
  • HF

In recent years, Europe-based hedge fund managers looking to gain foreign institutional capital have been challenged by the sovereign debt crisis which hit hedge fund performance within the Eurozone. Following the volatile financial climate experienced in Europe, regulations introduced such as the Alternative Investment Fund Managers Directive (AIFMD) and Solvency II have only added to the complexity of marketing European hedge funds abroad. Despite these issues, Preqin’s Hedge Fund Investor Profiles currently tracks 881 investors based outside of Europe which have an appetite for investing in the region, 721 of which are US-based investors. 

Written into national law last July, the AIFMD was aimed at providing harmonized regulatory standards across alternative investment managers, although many feared this would deter foreign investment. Europe-based hedge funds have been expected to become fully compliant with new regulations brought about in the wake of the financial crisis, with uncertainty surrounding its impact on the hedge fund industry. Despite the uncertainty that surrounded Europe’s economic climate, a significant proportion of US-based institutional investors are currently allocating to European hedge funds and thus these investors remain an important source of capital for many Europe-based managers. 

Certain US investors with a large capital base and strong resources are able to do the necessary due diligence with fund managers across the Atlantic. For example, 37% of US private sector pension funds demonstrate a preference for investing in Europe. Other prominent US investor groups targeting Europe include insurance companies (34% indicate an interest in the region), public pension funds (27%) and foundations (26%). Funds of hedge funds often operate with global mandates and 32% of US-based fund of hedge funds managers indicate that they will invest in Europe-based funds. European hedge funds are less desired by US-based endowments, with just 17% of these investors having a preference for the region, with many seeking opportunities more locally (88% have a preference for investing in North America). US-based private sector pension fund Raytheon Company Pension Plan is an example of an institutional investor actively targeting investment in Europe; the $19bn pension plan invests solely through direct single manager hedge funds and is currently seeking investments in new managers with a European focus. 

The UK continues to be the hub of the European hedge fund industry and thus it is unsurprising that it leads the way in regards to obtaining US capital. The three most invested with Europe-based managers by US-based investors, Brevan Howard Capital Management, BlueCrest Capital and Winton Capital Management, are all based in the UK. Other Europe-based managers such as Cevian Capital, based in Sweden, have gained significant capital from investors based in the US, and there have also been notable commitments to fund managers based in Italy and Switzerland. 

By investing in European hedge funds, US investors have the potential to invest in a range of different strategies and as a result they are able to build hedge fund portfolios which are diversified not only by style, but also by region. Although many institutional investors have yet to be convinced about the benefits of regulation in the hedge fund industry, Europe receives significant capital from US-based investors. As a result, there is enough evidence to suggest that US-based investors will continue to allocate to Europe-based funds should an attractive opportunity arise.

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