European Hedge Funds Extend Outflows Into 2017

Even as their peers elsewhere see some signs of relief, European hedge funds continue to struggle to stem outflows.

European-based fund managers saw outflows of $9 billion in Q1 2017, following outflows of $35 billion in 2016, according to research by Preqin. Assets under management declined to $657 billion at the end of 2016 from $674 billion at the end of 2015.

The European outflows come even as research firm eVestment reported that the overall hedge fund asset class saw allocations of $23.3 billion YTD—much higher than 2016, which saw outflows of $100 billion from hedge funds.

Anxiety over the European economy, political risk in the wake of Brexit, and fundraising regulations were among the drivers of the outflows, according to the report. The redemptions occurred despite strong recent performance. Funds in the region marked 11 months of positive returns with overall gains of 10.28%, according to the report.

The reluctance of European institutional investors over recent years to invest in the asset class is further pressuring European hedge funds. Europe-based investors have accounted for a decreasing proportion of capital allocated to hedge funds by institutional investors worldwide, the study noted. While Europe-based institutions accounted for 32% of institutional capital invested in hedge funds in December 2011, this figure fell to 21% in December 2016. The amount of capital invested in hedge funds by these investors peaked at $444 billion in December 2014, and has since decreased to $387 billion.

Other key findings of the study include:

• Traditional single-manager commingled vehicles represent less than half (47%) of all hedge funds in Europe, with UCITS funds accounting for more than one-quarter (26%).

• Of Europe-based investors, private-sector pension funds account for the largest proportion (21%) of capital invested, with insurance companies committing one-fifth of all capital.

• The UK hedge fund industry is the largest in Europe with $472bn in AUM, 47% of the assets held by managers based in the region.

• The three-year annualized return of all UK-based hedge funds stands at 3.08% as of the end of March, on par with the Preqin Europe Hedge Fund benchmark (+3.11%).

• Switzerland is the second-most prominent European market after the UK. There are 241 active hedge fund investors, 123 hedge fund managers, and 55 fund of hedge fund managers based in the country.

• Sweden-based investors have the highest mean current allocation to hedge funds of any European country, with institutions committing 13.4% of their AUM to the industry, above the Europe-based average of 10.3%.

• Of the 10 European countries featured in Preqin’s report, Spain-based hedge funds charge the lowest average performance fee (16.55%).

• Over half (56%) of Europe-based UCITS funds are domiciled in Luxembourg.