The Big Smoke or the Big Apple? | Chief Investment Officer

The UK capital and financial hub of London is seeing billions of pounds flood into new hedge fund launches this year, according to specialist website HedgeThink. Established managers who made their names at Ziff Brothers Investments and Tiger Management are reported to have raised significant amounts for new projects. It is already home to Man Group, Brevan Howard, and BlueCrest Capital Management of the top hedge fund firms globally.

On the other hand, the Big Apple has seeded more new hedge fund launches than any other city since the financial crisis, and is widely cited as the best city for hedge fund talent. Och-Ziff Capital Management, Paulson & Co., and Highbridge Capital are among the biggest residents. So which is the true capital of alternative strategies?

Data from Preqin shows unequivocally that New York-based hedge funds outperform their London rivals in the longer term, no matter what strategy. The margin is often quite pronounced: Multi-strategy funds in the Big Apple gained on average 8.28% a year in the five years to the end of April, while in London similar funds posted just 4.99% a year. New York’s macro funds gave investors 9.9% a year, while London’s managed just 2.86%.

In the first four months of 2015, London’s resident hedgies hit back, posting better returns than their rivals across the pond in five out of the seven categories Preqin’s data covers. However, New York’s winners were again the macro- and multi-strategy sectors.

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Next year will see the British public vote on whether to remain a member of the European Union. With the uncertainty and speculation this is likely to introduce over the next 12 months as the UK government attempts to renegotiate the terms of its membership—and with hedge funds widely said to favour a “Brexit”—it will come as no surprise if New York further strengthens its stronghold on the hedge fund sector.

Investments in alternative asset classes will reach $15.3 trillion by 2020, driven by demand from emerging sovereign wealth fund investors, PricewaterhouseCoopers (PwC) has predicted.

Its report—“Alternative Asset Management in 2020: Fast Forward to Centre Stage” —said demand for sustainable long-term returns would drive more investors away from mainstream equity and fixed-income investments.

The growth would mean assets in the alternatives space doubling in five years—Preqin’s latest data from January 2015 showed $7 trillion invested across hedge funds, private equity, venture capital, private real estate, and infrastructure.

Sovereign wealth funds in the Middle East have seen their assets swell despite falling commodity prices, and have hiked up their investments in real estate and infrastructure.

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“The shift in global economic power from developed to developing regions will drive continued focus on sovereign investors, fast-growing institutions, and the emerging middle classes in new markets,” said Mike Greenstein, global alternative asset management leader at PwC.

PwC’s report forecasted that growing pools of assets would result in sovereign investors based across Asia, Africa, and South America as well as the Middle East.

“These groups of investors will increasingly seek branded multi-capability firms,” Greenstein added. “Durability and profitability will be essential credentials for any alternatives firm which has ambitions to follow—or lead—the industry to the centre stage of the investment landscape.”

In 2014, Preqin said hedge fund industry assets alone grew by $360 billion, accounting for more than half of the year’s increase in assets under management across all alternatives sectors.