US-Based Institutional Investors Look across the Pond for Hedge Fund Investments – July 2015

by Nat Auld

  • 06 Jul 2015
  • HF

The increasing oversight of the hedge fund sector by regulators worldwide has added to the complexity of marketing European hedge funds abroad. While some industry commentators speculated that this might encourage more cautious investors to contemplate asset classes they previously had not given much consideration to, many managers were sceptical and feared that increased regulation might make it more difficult and costly to fundraise. However, Preqin’s Hedge Fund Investor Profiles currently tracks 1,008 investors based beyond Europe’s shores that have an appetite for investing in the region, the vast majority of which (82%) are US-based investors. This indicates that interest in European hedge funds remains strong, and to some extent, the Alternative Investment Fund Managers Directive (AIFMD) may be an appealing ‘stamp of approval’ for investors looking for hedge fund products.

US-based investors, often with large assets under management and significant investment resources, are well placed to carry out the necessary due diligence with fund managers across the Atlantic. Corporate pension funds are one such example of this type of investor and 39% of these US-based investors are currently willing to seek out potential investment in Europe. For example, Massachusetts-based Raytheon Company Pension Plan allocates 10% of its total assets, or $1.9bn, to hedge funds and has shown a preference for gaining exposure to Europe through its hedge fund investments. These investments have been primarily across UK-based managers.

Other prominent US investor groups targeting Europe include insurance companies (34% indicate an interest in the region), public pension funds (31%) and foundations (29%). Funds of hedge funds often operate with global mandates and 34% of US-based fund of hedge funds managers plan to invest in Europe-based funds. There is a smaller appetite for Europe among US-based endowment plans: just 17% of these investors demonstrate a preference for the region, with many seeking opportunities locally; 84% have a preference for investing in North America.

Although the risk of a Greek default is just the latest in a long line of obstacles on the road to recovery for the European financial market, the recent financial volatility of the region has provided opportunities to be exploited by sophisticated, experienced investors. Despite the increased regulatory burden and remaining uncertainty surrounding Europe’s economic climate, Preqin data suggests that a notable proportion of different US investor types are allocating capital to European hedge funds, and it will be interesting to see whether they will continue to seek opportunities across the continent and remain an important source of capital for managers providing exposure to Europe.

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