Hedge Funds in Europe 2005

• Draws heavily on Datamonitor's European Alternative Investment Survey 2005 covering 96 asset managers in Europe.
• Covers France, Germany, Italy, Spain and the UK.
• Sizes the hedge fund market by country by assets under management, and the top European competitors and investment strategies.
• Gives historic data for 2004 and the first half of 2005 and forecasts the market to 2009.

• Gain a unique picture of the market for hedge funds in Europe based on the views of Europe's premier asset managers.
• Understand the key success factors required to succeed in the market for hedge funds.
• See the strategic options for developing a hedge fund offering based on target market, scale, profitability and in-house capability.

EXECUTIVE SUMMARY

Market context

Distribution

Future market growth

The hedge fund market of the future

INTRODUCTION

What is this report about?

Who is the target reader?

How to use this report

CHAPTER 1 MARKET CONTEXT

Key findings

The hedge fund market in Europe is growing rapidly

The UK and France are the largest markets for hedge fund investment in Europe

The UK dominates hedge fund management in Europe

European equity is the largest investment class for hedge funds managed in Europe

Large hedge fund competitors are continuing to grow rapidly in the European market

Larger funds were the key beneficiaries of growth in the hedge fund market in 2004

Individual hedge fund competitors can be rapidly undermined by poor performance

GLG partners is the largest competitor in the European hedge fund market

A single European regulatory framework for hedge funds seems unlikely in the short-term

The US and Germany have pressed for pan-national hedge fund regulation

UCITS III has created a market for mutual funds with an element of hedge fund investment in Europe but not for pan-European hedge funds

The Markets in Financial Instruments Directive (MiFID) will affect the conduct of business rules for hedge funds

The European Union Savings Tax only affects hedge funds which invest in fixed interest instruments

The change from the Capital Adequacy Directive to the Capital Requirements Directive will have a limited impact on hedge funds

Most jurisdictions generally tax hedge funds in the same way as other investments

Tax remains a barrier to the distribution of foreign hedge funds in many countries

There continue to be major differences in the regulation of hedge funds in different juristictions

France offers a multi-step approach to hedge funds

New regulations introduced in 2004 opened up investment to mass market customers

Hedge funds in France are taxed in the same way as UCITS mutual funds

There continue to be considerable barriers to hedge fund investment in Germany

The Investment Act 2004 broadened access to hedge funds

The taxation of hedge funds was clarified by regulation introduced in 2003

Italian hedge fund regulation does not allow investment by mass market customers

Minimum investments for Italian hedge funds mean only ultra-high net worth and corporate customers can invest in the products

The tax treatment of hedge funds in Italy discriminates against foreign funds

Spain has regulated for the creation of a hedge fund market

The new regulation will make hedge funds available to HNW and corporate invesors in Spain

Most Spainish hedge fund investors will be taxed on both income and capital gains

The UK regulator remains cautious in its approach to hedge funds

In the UK hedge funds are only available to qualified and corporate investors

Mass market customers are still not able to invest in hedge funds but may be able to gain access to some hedge fund-like products

Hedge fund investments are fully taxed in the UK

Institutional customers are the most important customer segment for hedge funds in Europe

Institutions and HNW individuals are the key customer groups for hedge funds

The focus on HNW and institutional customers is fairly universal across different countries

Opportunities in the institutional market include the potential to sell into funds-of-hedge funds, pension funds and insurance companies

Most asset managers agree that funds-of-hedge funds is the most appropriate form of the product for investors

Data

CHAPTER 2 DISTRIBUTION

Introduction

Key findings

Financial advisers are seen as the best means of distributing hedge funds to mass market customers in Europe

Private banks are the key distributors of hedge funds to wealthy customers

The penetration of investment consultants within the institutional customer market varies between countries

Data

CHAPTER 3 FUTURE MARKET GROWTH

Introduction

Key findings

Hedge fund investment in Europe is expected to increase rapidly in the next five years

The hedge fund market is expected to experience strong growth across customer segments

Asset managers are expecting strong growth in the mass market investment in hedge funds

Nearly half of European asset managers believe that HNW investment in hedge funds will grow very rapidly

More than 60% of European asset managers expect strong growth in institutional investment in hedge funds

Spain is the country where the most hedge fund growth is expected to occur

Data

CHAPTER 4 THE HEDGE FUND MARKET OF THE FUTURE

Key findings

Regulatory issues are the key challenge facing hedge fund managers in Europe going forward

Asset managers in Spain were particularly concerned about regulatory barriers to growth

Further regulation of the hedge fund market is supported by asset managers in Spain and Italy

Hedge funds will become more consolidated and transparent

Most asset managers believe the hedge fund market will consolidate

Hedge funds are expected to become more transparent in order to attract funds

Most European asset managers believe that performance related fees will become more common in hedge funds

A strong history of investment performance will be the most important feature for successful hedge funds in the future

Data

APPENDIX

Supplementary data

Research methodology

Datamonitor's European Alternative Investments Survey 2005 methodology

Methodology for aggregating asset managers' growth expectations

Datamonitor's hedge fund investment market size estimates and forecasts

Market size estimates

Forecasts

Definitions

Arbitrage

CAGR

Derivative

Funds-of-hedge funds

Fund supermarket

Hedge fund

HNW

IFA

Liquid assets

Mass affluent

OEICs

Selling short

Ultra HNW

Unit trusts

Further reading

Datamonitor Savings & Investments SPP Reports

Datamonitor Savings & Investments SPP: Reports & Briefs

Asset Management and Funds

Offshore Financial Services

Retail Savings and Investments

Datamonitor Savings, Investments and Protection SPP: Interactive Models

Related Global Wealth Service SPP Reports

Datamonitor Global Wealth Service SPP: Reports

Datamonitor Global Wealth Service SPP: Insight Reports

Datamonitor Wealth Management Competitor Tracker

SPP writing team

List of Tables

Table 1: The European hedge fund market by location of manager, 2004-2005 H1

Table 2: European hedge fund assets by investment strategy, 2003-2005 H1

Table 3: European hedge funds assets by competitor, 2003-2004

Table 4: Which customer segment do you consider to be the core target market for hedge funds?, European overview

Table 5: Which customer segment do you consider to be the core target market for hedge funds? By country

Table 6: Institutional clients offer greatest potential for the hedge fund industry

Table 7: Which type of institutional investor is the main target market for hedge funds or funds-of-hedge funds?

Table 8: Responses to the statement: Funds-of-hedge funds is the most suitable way of providing investors with exposure to this asset class (hedge funds)

Table 9: What do you think is the best way for hedge funds or funds-of-hedge funds to be distributed to mass market investors?

Table 10: What do you think is the best way for hedge funds or funds-of-hedge funds to be distributed to high net worth investors?

Table 11: What do you think is the best way for hedge funds or funds-of-hedge funds to be distributed to institutional investors?

Table 12: European hedge fund market, hedge fund assets held by investors, 2004e-2009f

Table 13: Thinking of the next 3 years, how do you think demand for hedge funds or funds-of-hedge funds will change among mass market investors?

Table 14: Thinking of the next 3 years, how do you think demand for hedge funds or funds-of-hedge funds will change among high net worth investors?

Table 15: Thinking of the next 3 years, how do you think demand for hedge funds or funds-of-hedge funds will change among institutional investors?

Table 16: Thinking of the next 3 years, how do you think demand for hedge funds or funds-of-hedge funds will change among the following customer groups, approximate weighted average

Table 17: Thinking of the following customer groups, what do you think will be the major barriers to wider take-up of hedge funds or funds-of-hedge funds in the next three years?

Table 18: Thinking of mass market customers, what do you think will be the major barriers to wider take-up of hedge funds or funds-of-hedge funds in the next three years?

Table 19: Thinking of high net worth customers, what do you think will be the major barriers to wider take-up of hedge funds or funds-of-hedge funds in the next three years?

Table 20: Thinking of institutional customers, what do you think will be the major barriers to wider take-up of hedge funds or fund-of-hedge funds in the next three years?

Table 21: Fees linked to performance of hedge funds will become more common

Table 22: The hedge fund industry needs more regulation

Table 23: The hedge fund market will see significant consolidation

Table 24: Hedge funds need to become more transparent if they are to attract greater levels of investment

Table 25: What do you think is the key success factor an asset manager must have to succeed in the high net worth market for hedge funds or funds-of-hedge funds?

Table 26: Responses to the statement: Hedge funds cannot guarantee absolute returns

List of Figures

Figure 1: The UK dominates the market for hedge fund management in Europe H1 2005

Figure 2: IFAs are key in distributing hedge funds or funds-of-hedge funds to mass market investors across Europe

Figure 3: The UK is the largest of the "big five" European markets for hedge fund assets held by investors, 2004e

Figure 4: The UK dominates the market for hedge fund management in Europe H1 2005

Figure 5: European equity is the most important investment class for European hedge funds managers

Figure 6: GLG overtook Man Group and Vega AM to become the largest fund manager in Europe in 2004

Figure 7: Institutional investors are seen to be the core market for hedge funds in Europe, closely followed by HNW investors

Figure 8: There are limited differences is which customer groups are seen as key targets for hedge funds in different European geographies

Figure 9: European hedge funds believe institutional clients offer the greatest potential for the hedge fund industry, 2005

Figure 10: Fund of fund managers represent the biggest institutional target for hedge funds

Figure 11: Almost 80% of Europe's asset managers feel that funds-of-hedge-funds are the most suitable way of providing investors with hedge fund exposure

Figure 12: IFAs are key in distributing hedge funds or funds-of-hedge funds to mass market investors across Europe

Figure 13: Private banks and wealth managers are the favored channel for distributing hedge funds and funds-of-hedge funds to HNW investors

Figure 14: Direct sales are the most popular option for distributing hedge funds or funds-of-hedge funds to institutional investors

Figure 15: Germany is set to overtake France as a market for hedge fund investment, 2004e-2009f

Figure 16: Demand for hedge funds or funds-of-hedge funds from mass market investors looks set to soar in Spain over the next three years

Figure 17: Demand among HNW investors is expected to remain strong, although there is some potential for decline in the UK market

Figure 18: The institutional market for hedge funds and funds-of-hedge funds is expected to show strong growth across Europe for the next three years

Figure 19: Spain is expecting the strongest growth in hedge funds and funds-of-hedge funds across all client segments

Figure 20: Regulatory difficulties surrounding hedge funds are a clear concern across all client groups

Figure 21: Regulatory issues surrounding hedge funds and funds-of-hedge funds are a significant concern for Spanish asset managers

Figure 22: Opinions on the necessity of further hedge fund regulation differ substantially across Europe

Figure 23: More than 70% of Europe's asset managers believe that the hedge fund market will consolidate significantly

Figure 24: Increased transparency is necessary to boost investment in hedge funds

Figure 25: Performance fees on hedge funds are expected to become much more common, 2005

Figure 26: Past performance, brand and strength of distribution are important for asset managers to succeed in the HNW market for hedge funds