By Nick Evans
Well, what a difference a decent summer can make. It may
simply be the effect of all that Vitamin D from a rare
prolonged dose of British sunshine. It may only be the relief
for a long-suffering Arsenal fan of finally signing a truly
world-class football player.
It may just be, as behavioural finance experts point out,
that human beings are not equipped to be too pessimistic for
too long. Or it may even be that things are finally starting to
get better. Whatever the cause, it is hard to escape the
feeling that optimism is breaking out in the European hedge
fund industry again - after five long years of turmoil and
struggle, ever since Lehman went down over that fateful weekend
in September 2008.
Perhaps Mario Draghi has simply pulled off the greatest con
trick ever played, with his 'whatever it takes' intervention
last autumn seeming to mark a critical turning point in the
Eurozone's nosedive. Or perhaps the situation in Europe is
genuinely starting to improve, or at least to stabilise. Either
way, sentiment among international investors towards Europe -
and, more importantly, towards European-based hedge fund
managers - does appear to have undergone a decisive turn for
the better of late.
From being seen as almost a no-go zone for global investors,
Europe now seems to be regarded as offering a rich vein of
opportunities across a wide range of investment strategies - in
equity, in event-driven, in credit and in other areas too.
That may be largely the result of Europe simply being seen
as relatively attractive in what increasingly appears like a
global least-ugly parade. The earlier emerging markets euphoria
has turned very sour in recent months. China could go either
way. The jury is out on Japan's ambitious Abenomics experiment.
And the US markets are increasingly preoccupied with the huge
'known unknowns' of monetary policy unwinding and eventual rate
Set against this line-up of beauties, Europe doesn't look
half so bad all of a sudden. Although huge political, economic,
social and financial uncertainties remain - with the potential
still very much alive for things to unravel again - the
European continent appears like a relatively stable place to
invest, inconceivable though that might have seemed less than a
The facts certainly seem to support this impression. Recent
research shows that US investor inflows into European equity
markets are running at their record levels for many years. And
European long/short equity is now back on investors' radar
screens big time - after several years of being seen as an area
to avoid at almost any cost.
Many of Europe's largest and best known equity hedge funds
are either closed or getting close to capacity. Money is
finding its way into smaller and less obvious funds that have
found asset-raising nearly impossible for most of the past five
And new hedge fund launches - not just in equity, but in
credit and event-driven and relative value/arbitrage strategies
too - are attracting a level of interest and buzz that has been
in very short supply in recent years.
As our mid-year assets survey shows, stripping out the
effect of the crisis in managed futures - where performance
remains pretty wretched and investors are getting increasingly
twitchy - shows that the rest of the industry in Europe has
been growing at a decent rate over the past few months.
Good performance has helped, of course - with CTAs, which
are still the dominant sector in terms of market share, being
the one glaring exception. But asset inflows are starting to
pick up - and long/short equity in Europe looks to be starting
to reverse its long decline over the last few years.
And so it should be. If you want exposure to the upside
potential in European equity markets, but remain concerned
about protecting the downside risk in terms of outbreaks of
volatility and macro turbulence, then long/short European
equity looks like a pretty good solution.
Given that European long/short is still the largest sector
in the European hedge fund industry in terms of the number of
funds - with almost twice the number of that in any other
category, despite its diminution over the past few years - the
revival of interest can only be a good thing for the overall
mood and morale of the industry.
And it is not just equity strategies that seem attractive
either. Credit looks rich in potential. Event-driven
opportunities are starting to gather momentum. Activism is
picking up again - although not to quite the same extent as has
been seen of late in the US. Relative value and capital
structure arbitrage strategies offer interesting opportunities.
And there are lots of other areas where the restructuring of
the banking system is creating new avenues for hedge funds to
explore and exploit.
So is Europe back in vogue as a global hedge fund investment
destination? Perhaps. It's early days yet. But let's certainly
hope so. As the great Dylan sang, it's been a slow train
Now if only all those regulators would back off and find
someone else to hassle, things might just get back to the way
they were in happier, more optimistic and more productive