Hedge Funds in Europe 2008 - The European Hedge fund market is going through a period of exponential growth; however the extent of the MBS crisis on the market is uncertain. This report assesses the opportunities and pitfalls for this market

Overview

Catalyst

Summary

Methodology

Executive Summary

The European hedge fund market continues to grow beyond its traditional high net worth customer base

Key Issue: A significant onshore hedge funds market is constrained by regulation, psychological barriers and a need for investor and advisor education.

Institutional participation in the European hedge fund market is now entrenched; but mass market investors also represent a growing client segment

Clients still perceive the benefits of hedge funds for risk diversification

Reaching the mass market for hedge funds

Reaching the high net worth market for hedge funds

Reaching the institutional market for hedge funds

Asset managers rate Allianz, Deutsche Bank, Morgan Stanley, Man Group and Barclays among the leading hedge fund providers

Table of Contents

Table of figures

Table of tables

Key Issue: The Future For Onshore Funds In Europe

A significant onshore hedge funds market is constrained by regulation, psychological barriers and a need for investor and advisor education

France is one of the more successful hedge fund markets in Europe

Germany is constrained by complicated tax treatment of hedge funds

Italy has a EUR500,000 minimum threshold, which means only the HNW have access to hedge funds

Spain has a EUR50,000 minimum investment which restricts its retail opportunity

The UK is at a turning point in relation to its regulation of hedge funds

Sweden allows hedge funds and funds of funds to be marketed to retail investors

In spite of market constraints, onshore hedge funds have grown much faster than the overall mutual funds market in most countries, albeit from a small base

Education is among the biggest challenges to further development in this market

A lack of understanding about hedge funds is the main barrier to their wider take up in Europe

Investor education across Europe is the key to wider hedge fund take up

Regulation is being addressed in several countries

Changes to the regulation of hedge funds are a necessary precondition for their wider take up

The UK's FSA has recently released a set of proposals concerning the regulation of onshore hedge funds and has invited industry feedback

France and Spain are examining the regulatory regime covering hedge funds

Germany put the regulation of hedge funds on the agenda in 2007 and has introduced its own draft law

The Italian hedge fund market is exclusively for institutions and HNW at the moment, but the industry is pushing for lower minimum thresholds

Denmark introduced an onshore hedge fund industry in 2005

Norway has planned to introduce the regulation of hedge funds for some time and has recently been rocked by public authority losses as a result of hedge fund investments

Belgium has a restrictive regime

Sweden was one of the first countries in Europe to introduce a liberalized regime for onshore hedge funds

There have also been legislative initiatives at the European level that impact on the hedge fund market

Hedge funds in Europe are looking to a voluntary code

Funds of hedge funds will drive growth in onshore hedge funds

Demand for funds of hedge funds will outstrip demand for single hedge funds

Onshore hedge funds in Europe will grow by nearly 25% compounded annually to 2012

Market Context

The European hedge fund market is focused on institutional investors

Institutional participation in the hedge fund market is now entrenched

Asset managers must address institutional clients' demand for greater transparency

Mass market clients will become an increasingly important segment, especially in Germany

Retail investors can expect to see many new propositions as providers expand their funds of hedge funds ranges

Adverse economic conditions make for a more challenging marketing environment

A severe economic downturn in Europe is widely anticipated

Investors who remember the last downturn will be more cautious

Negative media coverage is likely to deter investors

Asset managers must demonstrate their expertise and stay close to their clients

Customers and Distribution Dynamics

Reaching the mass market for hedge funds

Mass market investors are attracted to opportunities to diversify their risk

But they are wary of a product class that they do not understand

UK mass market investors are most concerned about risk

Regulatory barriers limit the growth of the French mass market

German advisors lack the expertise to effectively market hedge funds to mass retail investors

Costs and competition are determining factors in Italy and Spain

Sustaining demand will depend on regular communications to investors

Overall, retail banks and IFA networks are the preferred distribution channels for mass market investors

Direct distribution is increasingly popular in Germany, Italy and France

Fund supermarkets are gaining ground in the UK and Spain

Action points

French asset managers will need to focus on client education through retail banks and their own sales teams

Retail banks will lead the distribution effort in Germany; but advisor training will be critical

Italian retail banking networks offer the best channels for educating and reassuring mass market clients

Spain's IFAs will need to encourage clients to diversify away from competing alternative investments

UK retail banks and IFAs will need to educate potential clients, pending enabling legislation

Reaching the high net worth market for hedge funds

HNW customers are driven by the search for diversification

Potential investors are most likely to be put off by lack of product knowledge

German providers need to invest most in HNW client education, while cost and liquidity issues are crucial in Italy and Spain, respectively

Insufficient promotion deters investors in the UK and growth among French clients is deterred by tax/regulatory issues

Current economic conditions call for heightened promotion and investor advisories to sustain HNW demand

In general, European asset managers prefer to reach HNW investors through direct sales, retail banks and IFAs

Italian and UK asset managers opt for distribution through retail banks

Spanish providers prefer IFAs and private banks

Action points

French asset managers must reinforce their internal sales forces to address the needs of wealthy clients

German providers need to deliver client education and investment information through wealth management partners

Retail banks distributing on behalf of Italian asset managers must focus on risk, protection and cost

IFAs and private banks provide a channel for reaching Spain's wealthy

UK asset managers will need to focus on getting it right internally and leveraging retail bank distribution

Reaching the institutional market for hedge funds

Institutional clients are after portfolio diversification

Product knowledge, costs and liquidity are the key concerns for would-be institutional investors

An enhanced information and portfolio review service will help to sustain confidence among institutional investors

Asset managers are likely to rely on direct sales and wealth managers to reach potential institutional clients

French providers are especially keen to eliminate intermediaries

But German and Italian asset managers are giving greater consideration to investment consultants

Action points

Direct efforts on the part of French asset managers must focus on investor communication

Increasingly, fund managers in Germany will need to court and convince investment consultants

Likewise, in Italy, the focus will be shifted to intermediaries

Spanish asset managers will maintain their focus on educating clients through internal sales teams, but will also rely increasingly on wealth managers for distribution

UK providers must enhance information and service delivered through internal teams and wealth managers

Competitors

Asset managers rate Allianz, Deutsche Bank, Morgan Stanley, Man Group and Barclays among the leading hedge fund providers.

Allianz is the leading institution for building hedge funds in France

Deutsche Bank is the most highly regarded hedge fund manager in Germany

Morgan Stanley tops the list of hedge fund managers in Italy

Spanish asset managers believe that MAN Group is the best at building hedge funds

Barclays is the best UK hedge fund provider

APPENDIX

Data

Definitions

Arbitrage

CAGR

Derivative

Fund of hedge funds

Fund supermarket

Hedge fund

HNW

IFA

Liquid assets

Mass affluent

OEICs

Selling short

Ultra HNW

Unit trusts

Methodology

Bibliography

Further reading

Ask the analyst

Datamonitor consulting

Disclaimer

List of Tables

Table 1: Regulation of onshore hedge funds

Table 2: Onshore hedge fund AUM, 2007-2012f

Table 3: Number of intermediaries, 2007

Table 4: The growth of onshore hedge funds and mutual funds

Table 5: To what extent do you agree with the following statement: 'Regulatory changes aimed at improving transparency of valuations are key to increasing mass market investment in hedge funds.'

Table 6: To what extent do you agree with the following statement: 'Over the next year, demand for funds of hedge funds will remain strong, although there will be reduced demand for single hedge funds.'

Table 7: Which is your biggest customer group for hedge funds today? 2007 & 2008

Table 8: Which will be your biggest customer group for hedge funds in three years time?

Table 9: To what extent do you agree with the following statement: 'Hedge fund managers will increase the number offerings for the retail market in 2008.'

Table 10: To what extent do you agree with the following statement: 'There is likely to be a significant economic downturn in Europe in 2008.'

Table 11: To what extent do you agree with the following statement: 'Investors will be more cautious about investing over the nextyears because of current conditions and their memory of the 2000-2003 downturn.'

Table 12: In your opinion, what is the most important reason why mass market investors are demanding hedge funds today?

Table 13: What do you think will be the major barrier to wider take-up of hedge funds by mass market investors over the next year?

Table 14: Facing the possibility of a global economic slowdown, which of the following strategies will be most effective in sustaining demand for alternative investments among your mass market clients or the wealth managers who advise them?

Table 15: What do you think is the best way for hedge funds to be distributed to mass market investors?

Table 16: In your opinion, what is the most important reason why high net worth investors are demanding hedge funds today?

Table 17: What do you think will be the major barrier to wider take-up of hedge funds by high net worth investors over the next year?

Table 18: Facing the possibility of a global economic slowdown, which of the following strategies will be most effective in sustaining demand for alternative investments among your high net worth clients or the wealth managers who advise them?

Table 19: What do you think is the best way for hedge funds to be distributed to high net worth investors?

Table 20: In your opinion, what is the most important reason why institutional investors are demanding hedge funds today?

Table 21: What do you think will be the major barrier to wider take-up of hedge funds by institutional investors over the next year?

Table 22: Facing the possibility of a global economic slowdown, which of the following strategies will be most effective in sustaining demand for alternative investments among your institutional clients or the wealth managers who advise them?

Table 23: What do you think is the best way for hedge funds to be distributed to institutional investors?

Table 24: In France, who are the best asset managers at building hedge funds?

Table 25: In Germany, who are the best asset managers at building hedge funds?

Table 26: In Italy, who are the best asset managers at building hedge funds?

Table 27: In Spain, who are the best asset managers at building hedge funds?

Table 28: In the UK, who are the best asset managers at building hedge funds?

List of Figures

Figure 1: Onshore hedge fund CAGR is outstripping onshore mutual fund CAGR in Europe

Figure 2: The major barrier to wider take up of hedge funds by mass market investors is a lack of understanding of the product

Figure 3: Asset managers see regulatory changes as key to increasing mass market investment in hedge funds

Figure 4: Demand for funds of hedge funds will remain strong, although there will be reduced demand for single hedge funds

Figure 5: The onshore hedge fund market is set to grow strongly

Figure 6: Institutional investors now dominate the European hedge fund market

Figure 7: Over the next three years, there will be notable growth in mass market demand

Figure 8: More retail hedge fund products will be offered in 2008

Figure 9: Economic conditions in Europe are expected to decline in 2008

Figure 10: Current conditions and the memory of the last major economic slowdown will affect investor behavior

Figure 11: Potential hedge fund investors will be cowed by reports of financial instability

Figure 12: Hedge funds offer mass market investors the opportunity to diversify risk

Figure 13: Lack of understanding is limiting mass market demand for hedge funds

Figure 14: Asset managers need to emphasize the benefits of hedge fund investing and keep clients abreast of their investment strategies

Figure 15: Mass market investors are best targeted through retail banks and IFAs

Figure 16: Risk diversification is the primary driver of demand among HNW investors

Figure 17: For would-be HNW investors, insufficient product understanding proves to be a deterrent

Figure 18: Fund managers need to work harder to promote their offerings and investment strategies

Figure 19: Preferred distribution channels for HNWs vary among countries

Figure 20: Institutional investors are using hedge funds for risk diversification

Figure 21: Regulatory/tax barriers are an issue for French and Spanish institutional investors

Figure 22: Providers and distributors would do well to keep institutional clients informed about investment strategies and portfolio performance

Figure 23: Providers in most states opt for distribution through direct sales or wealth managers

Figure 24: Allianz and Société Générale emerge as the best hedge fund managers in France

Figure 25: Deutsche Bank leads the market by a significant margin in Germany

Figure 26: Morgan Stanley leads the market in Italy, followed by Goldman Sachs

Figure 27: MAN Group ranks highest in Spain, but is closely followed by UBS

Figure 28: Barclays leads the UK market