European hedge funds struggle to break into U.S. market

Date: Thursday, June 20, 2013
Author: Laurence Fletcher, Reuters

European and Asian hedge fund firms are finding the potentially lucrative U.S. market impossible to ignore, but as tough as ever to negotiate.

Delegates at the annual GAIM conference in Monaco this week talked about the difficulties, particularly for small funds, in attracting new money to an industry once at the top of investors' wish lists.

With its pension funds, endowments and other investors now accounting for perhaps three quarters of new money flows into a funds sector increasingly desperate for new capital, breaking into the United States is seen as the holy grail for many foreign hedge fund managers.

But a mountain of regulation and local competition have made it hard going for some European managers, prompting some to wonder if it is worth the effort.

"(In terms of regulation) the worst is the U.S." said one high-profile European hedge fund executive, who declined to be named.

European industry insiders point to requirements to register with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which they describe as cumbersome and contradictory.

 

Executives are also wary of FATCA, the Foreign Account Tax Compliance Act, which from next year will compel foreign banks, investment funds and other financial institutions to hand over details to the U.S. Internal Revenue Service about U.S. taxpayers with accounts worth more than $50,000.

While some large European firms already fall under this requirement due to their having at least one U.S. client either directly or through a fund of funds, it nevertheless adds to the pressures facing those firms keen to diversify into the U.S.

One London-based hedge fund manager told Reuters he has scrapped plans to launch a version of his fund for U.S. investors because of the extra regulation he would have to face as a result.

"VERY COMPETITIVE"

Foreign firms who are actively trying to crack the U.S. market have had mixed success, with some finding the going tough against the U.S.'s huge number of domestic hedge fund managers.

"The U.S. is the largest market but is very competitive. All our largest competitors are based there. What sense does it make to deploy a tremendous effort with much less success?" said Arie Assayag, chief executive of UBP Alternative Investments, which manages $12 billion.

Meanwhile London-based Man Group manages $54.8 billion and has been trying to build its presence in the United States for several years, yet U.S investors still only account for 8 percent of its client base.

The firm, whose number of U.S.-based employees fell to 127 from 136 in 2012, reflecting job losses across the wider group, in December hired industry veteran John Rohal as executive chairman of Man, North America, from California-based Makena Capital to beef up its sales.

Al Samper, former chairman of the board of trustees of the Virginia Retirement Scheme and now a trustee of the pension scheme for employees at CERN, the European Organization for Nuclear Research in Switzerland, said investors were paying much closer attention to the regulatory jurisdiction of the funds they allocated to, reflecting broad concerns over the varied and unpredictable application of rules by different national powers.

However, some argue that if European funds can endure the time and costs associated with U.S. regulation, then they may have an edge.

"Being Europe-based makes it more challenging, but it also differentiates you - you can be seen as more global, or having a potential edge in Europe. It's ultimately returns that matter." said an insider at one major European hedge fund firm.