New fund launches in Europe still flag despite investor resurgence

February 28, 2014  

Although investor appetite for European-focused hedge fund strategies is rallying fast, the difficult business environment in Europe continues to keep new launches at very low levels

Five long years after the global financial crisis struck in earnest, the hedge fund industry in Europe is continuing to flat-line as far as new fund launch activity is concerned.

Although global investor interest in Europe – and in European-focused hedge fund strategies – has been reviving rapidly over the last few months, that change in sentiment has yet to feed through in terms of any decisive turnaround in new European hedge fund volumes.

That is the clear conclusion from the latest annual survey of European hedge fund launches to be conducted by the EuroHedge research and data team – which reveals that new fund activity in 2013 remained at near-record low levels despite the recovery in investor appetite towards Europe.

The survey shows that just 83 new offshore European hedge funds launched in 2013 – three fewer even than in 2012 – while the total volume of assets raised by those new funds amounted to less than $10 billion for the second year in succession.

Despite the strong performance of European equity and credit markets last year, and the generally robust performance of many European-based hedge funds too, regulatory uncertainty and a still cloudy overall business environment in Europe continue to exercise a significant restraint on the willingness and ability of managers to launch new funds.

Many established hedge funds in Europe still have investment capacity to spare after several years when Europe was largely off the radar for most international investors – although that capacity is starting to fill up fast again as a consequence of the resurgence in investor interest.

Institutional investors, for all their talk of increasingly wanting to look for smaller funds away from the mega-brands, are still hesitant for the most part about getting involved with new launches at an early stage.

Service providers, particularly in the banking world, remain very selective when it comes to partnering with prospective new hedge funds – partly as a result of their own broader internal business restructuring issues, but also partly in response to the subdued investor demand.

The uncertain and ever-changing regulatory environment is also creating a big barrier to entry – with the rising costs of compliance and other operational burdens due to AIFMD and a host of other new regulatory measures making it ever harder for start-up managers to get up and running, unless they have significant seed or 'strategic investor’ commitments from day one.

And, for many would-be start-up managers, the option of joining a large and established hedge fund platform still seems to offer a better risk/reward equation than the prospect of going it alone and launching a new business in what remains a difficult and risky climate.

But there are positive signs as well, despite the continued low levels of overall new launch activity. The first is the increasing appetite of some of the biggest and savviest backers of early-stage and emerging manager hedge funds – such as Blackstone, Paloma or Protege – for Europe-focused strategies, which has resulted in several significant recent seed-type deals.

The second is the growing desire of seasoned and senior managers at large and established hedge fund firms to start their own operations – with an accelerating line-up of well-known managers from top-tier European and US-based groups recently branching out on their own.

A third, in the absence of any new outbreaks of political and financial instability within the Eurozone, is that the fast-rallying flow of investor assets into the European hedge fund industry should start to spill over into the new fund side of the business as confidence builds among investors, counterparties and managers alike.

And the fourth is that the AIFMD – which has been such a source of confusion and uncertainty for most of the past four years – is at least moving into the implementation rather than the legislation stage, with the result that there is finally a good deal more certainty about what it means and how funds need to adapt.

But, despite a generally brightening horizon, the fact is that it remains exceptionally hard to launch a new hedge fund in Europe at the moment – and the figures bear this out.

Although there was a welcome pick-up of activity in the second half of the year (when some 51 new offshore fund launched in Europe, compared with just 32 in a dismal first six months of 2013), the overall levels of activity on the year are the lowest since 2002 – when the European industry was in its formative stages.

The total assets raised by new funds in 2013 – at a little under $9.4 billion – is only slightly ahead of the $8.8 billion that was raised by new funds in 2002 (although it also marks a small increase on the $8.8 billion figure that was also raised in 2012), while the number of new funds is less than half of the 181 new funds that were launched in 2002.

Although the average size of new funds in Europe is at an all-time high of $113 million – which, in itself, says much about the ever-increasing raising of the bar in terms of the institutional scale and structure required these days – the scale of the decline from the pre-crisis era is dramatic. In 2006, by contrast, more than 420 new funds were launched.

Adding in the 42 new UCITS European hedge fund strategies that were also launched in an onshore format in 2013 – raising $2.3 billion – brings the overall total of new hedge fund launches in Europe to 125, with combined assets of $11.7 billion (giving an average size of almost $100 million). But it is still a very far cry from the industry’s earlier heyday.

In terms of new offshore fund launches by strategy area, European equity – for many years the dominant area of activity in the hedge fund industry in Europe – ranked only fourth in terms of the number of new start-ups, behind global equity, credit and macro.

That says much for the respective appetite of investors towards those strategy areas, although the fact that the eight new European equity funds raised the largest volume of assets – at $1.7 billion – also underlines the potential for new funds to raise money at a time when the wider European long/short equity universe is so depleted by comparison with years gone by.

On the UCITS side, meanwhile, European equity remains the largest source of new hedge fund activity – both in terms of the number of funds launched (at nine, ahead of macro and global equity) and also in terms of the overall assets raised.

The table of the largest hedge fund launches during the year also underlines the extent to which investor appetite has been biased in recent years towards established firms with a brand name and a track record.

Only three of the top 10 launches are what one might regard as true start-ups or standalone new firms: Argentiere, the Swiss-based multi-strategy group led by former JP Morgan equity prop trading chief Deepak Gulati; Salt Rock, the new macro operation headed by former Caxton London head Mark Painting; and Andurand Commodities, the new firm established by ex-BlueGold co-founder Pierre Andurand.

Canosa, the London-based macro fund run by former Rubicon duo Tim Attias and Santiago Alarco which raised significant assets last year, is arguably also a new operation – although it is backed by Swedish multi-strategy group Brummer, which has a sizeable stake in the firm.

But the other six launches are all from existing firms: Cantab Capital’s CCP Core Macro fund, which was the largest new launch of the year in spite of the problems with Cantab’s flagship CCQ Quantitative CTA strategy; Old Mutual’s OM Arbea global equity market-neutral launch; Marble Bar’s MBAM Active Enhanced strategy; RWC’s European Focus activist vehicle; GLG Global Long/Short; and Swiss-based emerging Europe specialist Worldview’s new Special Opportunities event-driven and special sits fund.

In addition to these top 10 launches – all of which attracted assets of more than $250 million by year-end – there were numerous other new funds launched during the year that are running at least $100 million.

In equity these include: Ivaldi spin-out MSK Capital, run by Makis Kaketsis; the new CQS long/short equity strategy led by former SAC man David Morant; the TT Long/Short Focus vehicle, managed by Victor Kumar; Henderson’s new (and already closed) Volantis Catalyst small-cap activist fund; and Sloane Robinson’s SR Global Emerging Markets Equity roll-out.

Former JP Morgan investment bank head Bill Winters’ Renshaw Bay operation also provided a significant new launch during the year in the structured finance space, while former Centaurus manager Patrick Bierbaum’s Swiss-based PSquared event-driven launch also attracted strong investor interest.

In the credit, fixed-income and macro area other notable new start-ups during the year included former Deutsche credit trading head Antoine Cornut’s Camares and ex-Canyon London chief Mans Larsson’s Makuria.

And there were also two interesting new Nordic entrants with a strong institutional flavour: Crescit, a Swedish-based fund run by ex-Skanska pension fund managers; and Stockholm and Oslo-based Nordkinn, led by the former co-heads of asset management at Ericsson Treasury.

So, for all the difficulties in raising investor assets for new funds and despite the ever-rising cost of launching a new fund, there is still an impressive amount of new blood coming into the industry – from firms that can demonstrate a strong investment pedigree, a high-quality institutional infrastructure and an identifiable edge. It is not easy, but it can be done.

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