Hedge funds in Europe are shutting down at the fastest-ever pace as rising costs, weak performance, and a slowdown in the pace of new investment leads embattled founders to bail out.
Four in every 10 funds which closed last year were in Europe, home to a large number of smaller funds, as the total number of closures rose to a record 370, Eurekahedge data showed, even as other regions benefited from a rise in global industry assets to a record near $3tn (€2.6tn).
The trend in Europe comes after Eurkeahedge’s European funds index rose just 0.7% in 2014, way below a 5.5% gain by North American peers and notching up an eighth straight year of underperformance.
Among high-profile investors to recently ditch hedge funds, citing poor performance and high costs, were Dutch pension fund PMT and Britain’s Local Pensions Fund Authority.
The clean-out of weaker firms in a region with a relatively large number of smaller funds may help those remaining to get a bigger slice of the pie when things turn around, but it means reduced choice for investors and less business for those who service the industry, such as the investment banks who carry out their trades and are known as prime brokers.
Leading the way in closures with nearly a third of the total are so-called equity long-short funds, which bet on falling and rising stock prices. Computer-trading funds and those betting on macroeconomic issues also saw heavy casualties.
The bulk of the attrition was felt among smaller managers, or those managing $350m or less, although blue-chip names were not immune, with $27bn Brevan Howard and Bramshott both forced to close funds after poor performance.
Investors pulled a net $13bn out of European hedge funds in the second half of last year, having invested a net $35bn in the first half and $64bn in 2013, the data showed.
And lower returns in 2014 mean the lucrative performance fees charged by hedge funds in Europe shrank at a faster pace than global peers, leaving them with less money to invest in the business and retain key traders and portfolio mangers.
Compounding that financial quandary, smaller funds have found the cost of meeting new rules in Europe, particularly after the introduction of Europe’s Alternative Investment Fund Managers Directive, rise more than elsewhere.
“The pendulum towards more onerous rules in the US has stopped swinging. There is, at best, only very limited evidence of this in Europe,” said Peter Astleford, partner at law firm Dechert.
“For those who can ride out the current squeeze, however, the future may be brighter, especially if performance picks up, said Michele Gesualdi, chief investment officer at investment manager Kairos Partners.
“This is really the survival of the fittest environment. This year, European funds might surprise people in terms of generating returns.”
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