Although there are now said to be some three hundred hedge fund managers in Europe managing 10% of the $300bn (E285bn) estimated to have found its way into this asset class, the most important European players in the alternative asset class are without doubt the institutional multi-managers.
In the last seven years, a new wave of former institutional money managers have shed their brown suits and crepe-soled shoes in order to export their investment talents to the smartly attired private bankers of Europe. But the hedge fund investors in Europe, who have helped spawn this whole new universe of European hedge fund managers, and made Paris and London the preferred stomping ground of fundraisers, are much more familiar names to the man in the street than the managers themselves. The new institutional investors are those often managing truly discretionary pools of capital and count amongst their numbers giants of the insurance world like Swiss Re and Axa, as well as banks such as Nat West (Coutts), Barclays Bank, and Société Générale (in partnership with Frank Russell). The French group Axa has purchased the US hedge fund giant, Barr Rosenberg and has joined the ranks of Indocam (Greenway) and LGT as huge institutional players in the hedge fund industry.
Names like Leverage Capital Holdings and the grand dame of them all, Haussmann Holding, with combined assets under management of $4.5bn are indeed still big players in the hedge fund industry. However, these funds are vulnerable to the whims of their underlying investors who are as likely to be high net worth individuals as institutional investors. A large chunk of funds under management are drawn from the private bankers and smaller funds of funds. Today, many of the institutional investors that poured money into the first fund of fund businesses have recognised a simply economic truth. It is cheaper to build a fund of fund rather than pay the fees demanded by the established players. “Not in any instance have we heard of any investor seeking to renegotiate a mandate,” says Christopher Graves, a Geneva-based consultant. “What is occurring is not a gradual erosion of margins within the industry but a brutal sea-change,” he asserts. “The major banks and investment advisers, left grasping for performance in a competitive and harmonised Europe, have reasserted their franchise as gatekeepers, and recognised that an efficient manager selection process is cheaper to build than a fully fledged investment management business to compete with the likes of Fidelity and MAM.”
Figures from Trim Tabs published each week in the Wall Street Journal clearly illustrate that the new money that has found its way into the fledging European hedge fund industry is dwarfed by the monthly subscriptions to US mutual funds as a whole for example. On average $20bn a week is invested into US-based funds but if this makes the hedge fund industry pale into insignificance in comparison, it nonetheless reflects the importance of mutual fund trading in the US.
“Europe is catching up,” says Paolo Montorio di Veronese, a former in-vestment banker, who now advises in-vestment groups on raising capital in Europe. “Italian mutual funds assets doubled last year to $434bn and are expected to grow at a 22% annual rate in the next five years. This is almost double the rate in the US (12%).
“This year we have seen Putnam and Alliance Capital entering the fray with local partners. Meanwhile home grown giants like Unicredito and Mediolanum have established Dublin registered firms to offer hedge funds products internationally.”
The emergence of the big boys as direct investors in hedge funds has taken its toll on some of the smaller but long established names in the hedge fund industry. Charles Street Capital announced that it was returning funds to investors to reinvent itself as a fund sponsor. Sabre Fund Management which acquired the multi-manager activities of Rudolf Woolf in 1996, recently merged its activities with another small player, Argyll Asset Management, and focused more aggressively on marketing single manager funds. Atlas, another relative veteran of the multi-manager game has shifted some of the emphasis of their business to a number of single manager funds.
Quite simply, the clients of many of these groups are now running their own multi-manager programmes more cost effectively or otherwise being offered competitive products directly from the banks.
The assets of Greenway, the Indocam-run Bermuda registered firm, run by Frederic Neefs and Walter Clark from London and Chicago, and established in 1992, now exceed $1bn. Neefs explains: “We have always had an institutional focus and new product development is wholly client driven. Greenway has been globally diversified and we are now creating a series of Greenway Select Funds. Research has consistently shown how introducing alternative investments can improve risk-adjusted returns. Our clients are nowconvinced of the practical merits of alternative investments having been invested for some seven years.”
Coutts, Natwest Bank’s private banking subsidiary has just raised over $160m for its Orbita European Growth Programme to be invested with European managers. It already has over $320m invested in the Orbita Capital Return program, a globally invested fund of funds.
Even some of Europe’s wealthiest families, long-time the preserve of the private bankers, are setting up their own investment programmes in the style of the US family office, investing in traditional and alternative investments. These are often the fortunes of industrialists and the entrepreneurs who founded great business. They, like their bankers, are themselves making the decisions on who to handle their mandates. In response to this the private bank have been quick to counter. Earlier this year Bank Julius Baer announced the establishment of a family office to cater to family foundations and endowments. Pictet have also set up a family office department. “The demands of these clients are very complex and extend from asset allocation to complex tax planning questions and issues of succession, both in their businesses and their private wealth,” says Morag McLure, managing director of Pictet’s family office in Geneva. “ We are seeing an increasing interest in hedge fund products among our family office clients, either through our own fund of funds or through outside managers.”
The reassertion of the big players in the fund of funds landscape means the more prolific investor in the hedge fund realm is more likely to be your high street bank that a discrete boutique on the rue du Rhône.
Simon Hopkins is a director of Global Fund Analysis, a research and consultancy firm based in London