The European sovereign-debt crisis has wreaked havoc on financial markets and cast a pall of economic uncertainty extending well beyond the Continent that has made it difficult for hedge fund investors to know where to turn. Not surprisingly, funds plying such highly liquid and tactical trading strategies as macro and managed futures have shot to the top of Institutional Investor’s Europe Hedge Fund 50, our ranking of the 50 biggest single-manager hedge fund firms based in Europe. The top 50 such firms managed a combined $318.9 billion as of the beginning of 2012, according to the ranking. Although that is 21 percent less than the $405.3 billion the 50 largest firms managed at the start of 2008, it is well above their 2009 low of $285.1 billion.
Four of the top five firms in this year’s ranking are macro or managed-futures focused. These strategies, which gained popularity after the 2008 financial crisis because of their liquidity, have attracted even more assets in recent years. Macroeconomic uncertainty in Europe (and in the U.S. to a lesser extent) has created a risk on/risk off atmosphere that — at least in theory — is better suited to short-term trading styles.
“It’s a difficult environment for bottom-up security selection,” says Mark van der Zwan, a Philadelphia-based portfolio manager at Morgan Stanley Alternative Investment Partners fund-of-hedge-funds business. Van der Zwan says the policy-driven environment in Europe makes it difficult for stock pickers, because macro factors continue to dominate individual asset pricing.
But although hedge fund investors in Europe have poured plenty of money into the strategies meant to do best in this climate, trading-oriented funds have failed to live up to their promise. Last year macro funds in Europe lost 1.81 percent, while managed-futures funds lost 3.79 percent, according to EuroHedge indexes. Few hedge fund managers made money in 2011, with the EuroHedge composite index falling by 2.62 percent.
Meanwhile, fundamentally focused managers, particularly those running long-short equity funds, also struggled to make sense of the markets last year. European long-short equity hedge funds lost 4.77 percent in 2011.
But that may be changing. A rally in global equity markets boosted fundamentally focused managers during the first four months of 2012, while tactical traders continued to tread water. Through April macro funds returned 1.26 percent, while managed-futures funds lost 0.12 percent; global equity funds returned a comparatively robust 4.05 percent.
Take Man Group, the London-based hedge fund firm that tops this year’s ranking. Man had $36.5 billion in single-manager hedge fund assets (and $58.4 billion in total) as of December 31, but its assets have fallen sharply on the back of performance losses in its managed-futures-focused AHL division, whose Man AHL Diversified fund lost 6.8 percent in 2011 and was down another 0.61 percent through April of this year. Man’s total assets stood at $59 billion at the end of the first quarter.
One bright spot for the firm was strong performance by funds in its GLG Partners hedge fund unit, particularly among long-short equity funds. Its European equity fund, run by GLG co-founder Pierre Lagrange, was up 8 percent this year through March. (Man acquired GLG in 2010, instantly making it the largest hedge fund manager in Europe by some distance.) Although Man was the largest European hedge fund firm as of the beginning of the year, market volatility and poor performance had taken a toll on the firm over the 12 months through March, driving its total assets down 14.6 percent, from $69.1 billion, including a $3.2 billion drop in its own AHL hedge funds and a $1.9 billion decrease for GLG.
Global macro manager Brevan Howard Asset Management and managed-futures firm Winton Capital Management hold the second and third spots in this year’s ranking, respectively, while systematic trading manager BlueCrest Capital Management lands at No. 4. All three London-based firms delivered solid returns in 2011, besting their peers in their respective strategies.
Brevan Howard, which grew its assets to $34.2 billion from $32 billion last year, and BlueCrest, which raised its assets under management to $28.6 billion from $24.5 billion, have both invested significant resources in building out their U.S. presence and marketing staffs in recent years. The effort seems to have paid off, as both these firms have been scoring considerable mandate wins on the western side of the Atlantic.
Brevan Howard, founded by former Credit Suisse proprietary trading chief Alan Howard ten years ago, posted an impressive 12.04 percent gain in its flagship Master Fund in 2011, a year when the average hedge fund fell by 2 percent, according to HedgeFund Intelligence. As a result, the firm has recently won several pension clients, including the Pennsylvania Public School Employees’ Retirement System and the New York City Retirement Systems. Meanwhile, BlueCrest has attracted investments from the Wisconsin State Investment Board and the New Jersey Division of Investment, among others. Its BlueCrest Capital International fund gained 6.13 percent last year.
Former JPMorgan Chase & Co. proprietary traders Michael Platt and William Reeves founded BlueCrest in 2000. The firm’s systematic BlueTrend fund, which is managed by Leda Braga, has been particularly popular with investors. It has produced annualized gains of 15 percent since its launch in April 2004.
Winton Capital Management experienced the biggest jump in assets among the top 50, rising nearly 69 percent. The firm grew from $17.8 billion last year to $30 billion as of January 3. Like many highly liquid fund managers, Winton served as a virtual cash machine in 2008 as investors pulled funds from managers that could grant them liquidity, regardless of how well they performed. But thanks to strong performance, Winton has bounced back.
The same can’t be said for all European macro and managed-futures managers, which have underperformed other strategies, such as credit. “In the long run the macro industry has not made much money, and I think investors will be disappointed if that continues to happen,” warns Rob Kaplan, CIO at the New York–based fund of funds Permal Group.
Deepak Gurnani, New York–based head of hedge funds for alternative investment firm Investcorp, has been investing in European managers since 1996 and has up to one third of his portfolio’s assets in European firms. Although he holds managers in Europe in high regard — “there are more inefficiencies to exploit there,” he says — he is avoiding long-short equity strategies. “I do find that equity managers in Europe tend to have a lot of market beta in their portfolios,” he says.
One notable example of an equity long-short firm that stumbled badly last year is London-based Lansdowne Partners, a perennial winner among European hedge funds in terms of performance that lost its footing in the volatile environment. Its assets fell from $16.1 billion to $11.8 billion last year; its Lansdowne U.K. Equity Fund lost approximately 20 percent in 2011 as a result of bad bets on financials.
Sixth-ranked Lansdowne has traditionally delivered strong returns — 15.5 percent on an annualized basis since it started trading, in 2001 — but 2011 proved to be a trying year for the equity manager, which was co-founded by chief executive officer Paul Ruddock and portfolio manager and chief financial officer Steven Heinz. Peter Davies and Stuart Roden, portfolio managers for the Lansdowne U.K. fund, revealed in a year-end investor letter that the fund’s sizable stakes in JPMorgan, Wells Fargo & Co. and Lloyds Banking Group were the biggest contributors to its losses in 2011. In this year’s ranking Lansdowne is the only long-short equity manager in the top ten.
As in the U.S., hedge fund assets in Europe are flowing to the largest, most well-established managers. “A lot of the ones at the top are the ones that were already quite big,” says Damien Loveday, global head of hedge fund research at investment consulting firm Towers Watson. Loveday, who is based in London, explains that many pension funds and other institutional investors have been allocating to hedge funds for the first time, so the money has tended to go to more brand-name firms. “Institutional quality is often assumed to exist where there are substantial assets,” he says. Large firms that have experienced asset spikes in the past year include Stockholm-based quant and systematic manager Brummer & Partners (No. 10); London-based activist investing firm Cevian Capital (No. 13); London-based systematic trading firm Aspect Capital (No. 14); and London-based equity-focused firm Marshall Wace (No. 15).
One area investors are eyeing is credit, on the grounds that managers in that strategy could stand to benefit from the current environment. Many European and U.S. credit managers have been preparing for a flood of investment opportunities coming from European banks looking to unload assets from their balance sheets. “There has been a lot of sniffing around among people that are looking to play the European distressed cycle,” says Permal’s Kaplan.
But Morgan Stanley’s van der Zwan thinks it’s too early to be investing in the sector. “We have only seen a limited amount of European banks selling core assets,” he says.
In the meantime, the situation in Europe could have various negative implications for European managers. Some investors are concerned about potential bans on shorting or credit default swaps, while others are looking at how managers’ relationships with troubled European banks could affect hedge funds. “The debt crisis won’t directly affect these guys, but I think the more worrying issue is the outcome for the banks that are potentially offering leverage and other services to hedge funds,” according to Towers Watson’s Loveday.
“Market participants are pricing in two possible outcomes: an optimistic scenario where policy success leads to a sustained recovery and a pessimistic end game where the European crisis deepens,” says van der Zwan. “Changing views on the probabilities associated with each of these scenarios have fueled this risk on/risk off market environment.” • •
