The fortunes of European and US funds of hedge funds have become increasingly polarized over the past year, as the 2015 Preqin Global Hedge Fund Report found. In an extract from March’s edition of Preqin’s Hedge Fund Spotlight, we look at this trend and assess whether it is likely to persist in the longer term.
Funds of hedge funds have had a challenging road to recovery following the fallout of the global financial crisis and the events surrounding the Madoff scandal in 2008. The industry’s assets under management fell from a peak of USD1.2tn in December 2008 to USD948bn by the end of the following year. Nevertheless, today the industry has recovered some of the assets lost over recent years, and has reached its largest level since 2011, with total assets exceeding USD819bn at the end of 2014. One notable trend that emerged last year was the expanding divergence of fortunes between North America- and Europe-based funds of hedge funds. Here, we take a look at the factors that have driven these trends and assess to what extent this divergence in fortunes will continue going forward.
Changing Industry Assets under Management
There has been a divergence in fortunes of the North American and European fund of hedge funds sectors since 2011. Before this period, each region experienced similar growth or decline each year (Fig. 1); however, where North America-based fund of hedge funds managers have since enjoyed three consecutive years of expanding assets under management, Europe-based managers have suffered three years of decline. In December 2011, just USD110bn separated the assets under management of each region; in December 2014, this figure had expanded to USD395bn.
North America-based funds of hedge funds added USD56bn over the course of 2014, taking the region’s assets under management to USD590bn as of December 2014. North America-based funds of hedge funds have become the dominant force in the sector; at the height of the financial crisis these funds represented 52% of the industry’s capital; today, that figure has increased to 72%, with the bulk of investor inflows going into funds of hedge funds headquartered in the region.
In contrast, Europe-based funds of hedge funds lost USD27bn in assets under management over 2014. The instability of the financial markets in the wake of the Eurozone crisis and the implementation of the Alternative Investment Fund Managers Directive (AIFMD) has significantly curbed the operation of Europe-based firms over the past few years. In 2014, exactly half of the hedge funds liquidated over the course of the year were managed by a Europe-based firm. In fact, more funds of hedge funds in Europe were liquidated (26) than were formed (20) in 2014, further highlighting the industry’s decline. In addition, fundraising in Europe has been more challenging; notably, Europe-based investors remain cautious of investing in hedge funds and have not shown the same recovered outlook on the asset class as their North America-based counterparts.
Meanwhile, fund of hedge funds managers based in Asia-Pacific added USD5bn to the USD20bn of assets held in December 2013, to grow to USD25bn in December 2014. Although around one-third (31%) of all funds of hedge funds liquidated in 2014 were based in Asia-Pacific, the prospects for continued growth in this region’s fund of hedge funds assets under management are good: more than twice the number of funds of hedge funds launched in Asia-Pacific in 2014 than in 2013. This has been driven by interest in the market among institutional investors, with Preqin currently tracking 390 investors that have reported an appetite for fund of hedge funds vehicles investing across Asia-Pacific. In addition, recent regulatory changes to allow for fund management in places such as China and India are increasing the opportunities for fund managers in the region to launch their first fund.
Elsewhere, for the third consecutive year, fund of hedge funds managers based outside North America, Europe and Asia-Pacific have maintained their assets under management at or around the USD5bn mark. In December 2014, the assets under management of these managers amounted to approximately USD5.2bn. The majority of these assets (73%) are held by fund of hedge funds managers based in Brazil and South Africa.