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October 9, 2006
Europe Loves Hedge Funds, In Theory Anyway
European institutions continue to profess their enthusiasm for alternative assets, including hedge funds, but to date they have failed to follow through on that enthusiasm by actually investing in them.
According to a new report from Greenwich Associates, the proportion of continental European institutions that said they invested in hedge funds increased to 35% in 2006 from 26% in 2005. Another 10% of institutions said they planned to begin investing in hedge funds soon. However, actual allocations to hedge funds and private equity have remained in the 2% range since 2004.
"Although allocations haven't budged, European institutions remain bullish on alternatives—at least in theory," said Tobias Miarka, a consultant at Greenwich Associates, in a statement.
The Greenwich report showed that 41% of continental European institutions expect their private equity and hedge fund allocations to increase by 2009. Only 1% said they expected such allocations to decrease. According to Greenwich's figures, the average institutional hedge fund investor in Europe has 200 million euro ($253.7 million) invested in hedge funds, usually spread among three or four individual managers, or more often among fund of funds managers.
The interest in hedge funds and other alternatives follows a trend in Europe of seeking out more non-European investments, Greenwich found. Institutional assets in continental Europe grew by 7% in 2005, driven by good stock performance. Following on that, European institutions upped their equity allocations to 26% from 23%. Even so, fully two-thirds of institutional assets sat in fixed-income and money market accounts at the start of 2005, which limited the positive effects of strong equity market performance, according to Greenwich. And there is little to suggest that institutions are prepared to break with tradition and move fixed-income assets into equities.
Rather, institutions are looking to diversify their equity exposure by increasing allocations to non-European equities, Greenwich found. Almost one-third of European institutions told Greenwich that they expected to increase allocations to Japanese equities, for example, over the next three years. Another 42% of institutions said they would up allocations to emerging markets equities by 2009.
"Our research suggests that a large proportion of Continental pension funds, banks, insurance companies, and other institutional investors are taking significant steps away from the somewhat tradition-bound investment practices that characterized the industry for the previous 50 years," Greenwich consultant Markus Ohlig said in a statement.
Not everyone is excited about hedge funds, however. Speaking to Investments & Pensions Europe, Frank Field, the former pensions minister for the United Kingdom, said he thinks future hedge fund performance won't be as good as it has been recently. In response to news that the House of Commons pension fund is considering investing in hedge funds, Mr. Field said that as hedge funds have seen more assets flow in, returns have become mediocre. In an interview with IPE, he likened hedge fund investing today to "jumping on a bandwagon whose best times are past."
The information about European institutional investing is contained in Greenwich's 2006 Continental European Investment Management Research Study, which analyzes strategic shifts by continental European institutions and documents growth in assets under management, allocation changes, and compensation levels for investment professionals.
-HedgeWorld.com-
Posted by su at October 9, 2006 11:15 AM