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 increases.
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 year ago.
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 years.
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 coming.
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 times.