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US-Based Institutional Investors with an Appetite for Europe-Based Hedge Funds

by Graeme Terry

  • 10 Sep 2012
  • HF

Institutional investors in hedge funds are increasingly looking for new markets to tap into; as a result, many are looking at opportunities to invest in foreign funds. The recent financial crisis in Europe has affected fund managers in this region, with some investors choosing to avoid the region as a result of the volatile markets. However, despite the obvious problems, a number of US-based institutional investors continue to show an appetite for Europe-based funds, and high-performing managers have been successful in growing through allocations from US-based investors. Preqin currently tracks 294 US-based investors that are showing an active interest in investing in European hedge funds.

Funds of hedge funds often operate with global mandates and 19% of US-based funds of hedge funds indicate that they will invest in Europe-based funds. Other prominent investor groups targeting European investment include public pension funds (18% indicate an interest), insurance companies (18%) and asset managers (14%). These investor groups typically have a large capital base and strong resources, which means they are able to do the necessary due diligence on overseas managers. Europe-based funds are less popular with US-based endowments, foundations and private pension funds as these groups seek opportunities either locally or in more emerging markets depending upon their risk appetite.

In terms of the strategies sought by US-based investors targeting Europe, long/short equity is the most prominent strategy, with 81% of these investors interested in the strategy. Other popular hedge fund strategies among these investors include multi-strategy (61%), macro (54%), event driven (53%), distressed (47%), and long/short credit (43%). Investors across all regions in the US are showing an interest in Europe-based hedge funds. In terms of numbers, New York is the most prominent state, with 18% of all interested investors based there. California (10%), Illinois (8%), Connecticut (6%), Texas (6%), and Pennsylvania (6%) also provide a significant number of potential investors for Europe-based hedge fund managers.

In terms of where the hedge fund managers are based, London is generally considered to be the hedge fund capital of Europe. Popular hedge fund managers among US investors headquartered in London include BlueCrest Capital, Brevan Howard Asset Management, and Lansdowne Partners. Fund managers in other parts of Europe also have opportunities to obtain institutional capital from the US, with funds based in countries such as France, Italy, Sweden and Switzerland proving popular.

The outlook for Europe-based hedge fund managers looking to obtain institutional capital remains mixed, as growing numbers of investors are avoiding Europe due to the ongoing sovereign debt crisis. Despite these problems, there is enough evidence to suggest that US-based investors will allocate to Europe-based funds should an attractive opportunity arise. However, managers need to be able to show evidence of strong performance as concerns over hedge fund returns are continuing to grow.

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