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Europe’s Top 50 Hedge Funds Suffer Carnage

Date: Wednesday, June 10, 2009
Author: iimagazine.com/Alpha

Alpha's Europe Hedge Fund 50 hurt by performance losses and investor withdrawals.

It seemed nearly impossible for even Europe’s most successful hedge fund managers to dodge the blizzard of redemptions that characterized 2008, as investors rushed to meet their personal liquidity crises by cashing in hedge fund holdings wherever they could.

The fate of Paris-based Sinopia Asset Management, the HSBC-­owned quantitative specialist, encapsulates what was a perversely frustrating year for strongly performing investment firms.

“Ironically, two of our flagship funds’ key selling points — strong performance and daily liquidity — were behind considerable redemptions,” Jean-­Charles Bertrand, ­global head of fixed income and absolute return, says of the firm’s now $2.8 billion Global Bond Market Neutral strategy, which shrank last year along with Sinopia’s overall assets, which dropped to $5.8 billion from $12.4 billion. “No lockups meant that [investors] could sell, and good performance meant that people were ­happy to take profits at a time when they were scarce.”

[To view the complete rankings of the Europe's biggest hedge funds, click on 2009 Europe Hedge Fund 50]

The same phenomenon was on display at London-­based HSBC itself, where hedge fund assets plum­meted to $6.9 billion from $13.6 billion. Even so, HSBC remains one of the top firms in Alpha’s annual Europe Hedge Fund 50 ranking of the biggest single-­manager, Europe-­based hedge fund firms, finishing No. 11 this year, down only two spots from 2008. HSBC’s story — and Sinopia’s — were familiar across the industry: In Europe, the U.S. and elsewhere, managers were hurt by the double whammy of poor returns and investor redemptions — which affected laggards and winners ­alike.

Total assets in this year’s Europe Hedge Fund 50 have ­fallen spectacularly, to $285.1 billion from $405.3 billion, a 30 percent drop, worse than the ­global shrinkage, as detailed in Alpha’s Hedge Fund 100 (see “After the Fall,” May 2009), in which assets under management decreased by 24 percent, to $1.03 trillion from $1.35 ­trillion.

According to Singapore-based data compiler Eureka­hedge, contraction among European hedge funds came almost equally from performance losses and ­withdrawals.

Only minor consolation is provided by the fact that, in the hedge fund industry’s worst year on record — in which the average fund fell 19 percent globally — the European managers slightly outperformed the ­broader industry, logging losses of about 18 percent, according to Chicago-based Hedge Fund ­Research.

Europe’s hedge fund business, which continues to be heavily London-­centric (of the Europe Hedge Fund 50 firms, 40 are based in London, which is also home to ­every firm in the top 15), may be looking at an encouraging longer picture, however. Although Europe still plays second fiddle to the U.S., the speed of its ascendancy since the 2003 rankings is notable. Six years ago, 93 percent of the $159 billion controlled by the world’s 25 biggest firms was run by U.S. managers. At the beginning of this year, seven of the 25 biggest managers in the Hedge Fund 100 were European, and the Europe Hedge Fund 50 now control about 28 percent of the total assets managed by the firms in the Hedge Fund 100. ­Europe also boasts five of the 20 biggest managers in the world — led by Brevan Howard Asset Management and Man Investments — up from two in 2003.

Given the general flow of assets out of hedge funds, ­it’s remarkable that some firms — ones at the top of the ranking — managed to grow in 2008. The five biggest had $1.7 billion more in assets at the beginning of this year than at the end of 2007. Apart from Horseman Capital Management, nowhere was this trend-­bucking more visible than at Brevan Howard, where founder Alan Howard’s flagship fixed-­income Master Fund returned more than 20 percent, helping total ­assets swell almost $6 billion, to $26.8 billion, and elevat­ing the firm from third to first. Second-place Man Investments had a similarly strong year, using computer-­powered managed futures funds to benefit from big swings in the commodities markets; its AHL Diversi­fied program ­returned 33.2 percent, and overall ­assets grew by $3.5 billion, to $24.4 billion.

Brevan Howard and Man provided the headline to last year’s resurgence of global macro and managed-­futures managers, with the strategy returning almost 5 percent globally in 2008, according to HFR.

No. 6 Winton Capital Management, established by ­David ­Harding, a former Man executive and co-founder of AHL, also ­prospered in a difficult trading environment (see “New World Masters,” May 2009). Despite bearing second-half redemptions totaling $3.2 billion, Winton, a managed-­futures firm, is a big climber. It moves up eight spots in the ranking, as its assets under management increased by nearly $1 billion, to $12.4 billion. Its ascent was spurred by strong performance in its flagship, $4.6 billion Futures Fund, which returned 21 percent in 2008 after returning 18 percent in 2007. Harding says the trick is to focus on research into small irregularities in pricing: “Our approach is to forecast the whole probability distribution of the market to get a consistent small advantage, rather than the heroics of getting the Standard & Poor’s 500 index price on the nose on December 31.”

The two top-ranked firms last year have been taken down a few notches. Barclays Global Investors falls from No. 1 to No. 3, and GLG Partners drops from No. 2 to No. 8; the firms saw their assets drop, respectively, 35 percent and 52 percent.

Redemptions were also considerable at No. 7 Lans­downe Partners, which maintained a strict no-­gating policy throughout the year and saw assets fall by 37 percent, to $12 billion, despite a modest positive return of 0.6 percent in the firm’s main vehicle, the $6.9 billion U.K. Equity Fund. At No. 15 Gartmore Investment Management, assets under management dropped by 51 percent, to $6.2 billion, although the firm’s performance was a long way from bad (its $1.9 billion AlphaGen Capella Fund, for instance, was down just 3.6 ­percent).

“Fund-of-hedge-funds investors have redeemed the most liquid funds, regardless of performance, to meet their own redemption pressures,” explains Paul Graham, global head of alternatives at Gartmore. “As such, we have suffered exponentially when measured against funds that have imposed gates.” Graham adds that his firm anticipates investors will repay its benevolence by eventually reallocating capital to ­Gartmore.

Horseman Capital, No. 13, is among the rare firms that saw their assets soar in 2008. Horseman’s capital was up 81 percent, to $6.5 billion. The firm benefited from strong performance in its Global Fund, a long-short directional pool that had a 30.8 percent return. The fund maintained a net short exposure through the year, allowing it considerable gains from the equity markets crash. Small increases in subscriptions also ­helped.

Marshall Wace drops from No. 8 to No. 12 this year, in part because of co-­founder Paul Marshall’s pursuit of what he called “fantastic buying opportunities” in the banking sector last summer, which ­didn’t turn out to be quite so fantastic. Total assets under management at Marshall Wace fell to $6.6 billion at the start of this year from $15 billion at the end of 2007.

Firms whose investment styles require investors to have long-term horizons generally suffered fewer ­redemptions and were able to climb in the ranking. No. 25 Cevian Capital, a $3.4 billion Stockholm-­based firm that is this year’s second-­highest-­listed new entry, made its mark through activist investment in Northern European ­markets.

“Our average holding period per investment has been about three years — typically how long it takes to implement fundamental change at companies,” says co-­founder Lars Förberg. “We required similarly long commitments from our investors, and a down market like this is rich with opportunity for us — we can continue to take investment decisions using a ­medium-term horizon, when most other investors are very short term.”

One potential cause for optimism among fund man­agers that have absorbed big outflows is that a reversal may be in the works. Eureka­hedge data showed net outflows dropping from $21 billion in January to $10 billion in February and to less than $3 billion in March, the most recent figure ­available.

Bill Maldonado, head of alternatives at HSBC-owned Halbis Capital Management (U.K.), says that whether hedge funds put up gates — and why — may well shape their future and determine whether they “have done long-term damage to their relations with ­investors.”

This year’s Europe Hedge Fund 50 includes ten new entrants. Notable among them is No. 35 James Caird Asset Management, which last February spun off from New York–based Moore Capital Management. Established by Tim Leslie, who took 30 colleagues and a significant seeding stake from his former employer, the firm, with $2.4 billion in assets, has almost reached its $2.5 billion ­target.

Among the firms that fall out of the ranking are London-­based Hermitage Capital Management, which last year was the 43rd-­biggest European manager, with $3 billion in assets ­under management. Hermitage had been bullish on Russia, where it has been an activist investor and has complained to prosecutors that it has been targeted in fraudulent lawsuits.