Hedge Fund Investors Returning to Europe as Crisis Concerns Fade

Hedge-fund investors are returning to Europe after concluding that the sovereign debt crisis has eased enough for traders to make money in the region again, according to a survey by Credit Suisse Group AG.

Net demand among clients for hedge funds focused on Europe climbed to positive 26 percent from negative 2 percent a year ago, the biggest swing in sentiment of 13 geographic regions tracked by the Zurich-based bank. The figure is derived by subtracting the number of investors who say they intend to redeem money from hedge funds from those who say they plan to add assets, Credit Suisse said in a report today.

Clients have become more comfortable about investing in Europe after Mario Draghi said in July he would do all he could to save the currency bloc. The president of the European Central Bank’s pledge eased concerns about a sovereign default and revived interest from investors eager to avoid missing out on a rally in asset prices, Credit Suisse said.

“Nobody feels it is over, but as it continues to move in the right direction, people are coming back,” Robert Leonard, Credit Suisse’s global head of capital services, said in an interview. “The change is indicative of that fact that last year, people were really underweight developed Europe.”

While worries that Greece, Portugal or Spain will default on their debt have diminished, political uncertainty remains one of the top concerns of global hedge fund investors, Credit Suisse found. Such anxiety returned last month when Italian voters failed to give any political party enough support to form a government, renewing concerns about whether the country will adhere to austerity measures set by European officials.

Emerging Markets

Credit Suisse surveyed investors from the middle of December through the middle of January, before the Italian election results were announced on Feb. 25, Leonard said. The political stalemate has driven up relative funding costs for Italian, Spanish and Portuguese companies, with the spread between their bond yields and those of their counterparts in Germany and France widening, according to Bank of America Corp.

Credit Suisse found investor appetite remains greatest for funds focused on emerging markets, at 42 percent, and on the Asia-Pacific region. Net demand for hedge funds investing in North America fell to 14 percent from 28 percent, the bank said.

Global hedge-fund assets may rise 10 percent to $2.42 trillion by the end of the year, with net inflows and positive investment performance leading to the gain. The firm based its findings on a survey of more than 550 clients with about $1.03 trillion invested in hedge funds.

Equities Targeted

Clients plan to add the most money this year to hedge funds that trade stocks. The bullish view on equities has proved correct so far in 2013 after the U.S. Dow Jones Industrial Average climbed to a record this week.

Investor concern that so-called tail-risk events, such as a European default or a budget impasse in the U.S., will trigger a sell-off in equities has diminished. Clients have concluded that hedge funds will be able to select winning and losing companies in 2013, as stocks no longer trade in lockstep with each other, Credit Suisse’s Leonard said.

“Correlations are coming down and it’s becoming a much better environment for stock pickers,” he said.

The bullish view on stock-focused hedge funds marks a reversal from seven months ago. A July survey by the same bank found 26 percent of clients said they planned to cut their allocation to long-short equity funds in the third quarter. Equity hedge funds underperformed the Standard & Poor’s 500 Index and other market benchmarks on average in 2010, 2011 and 2012, prompting some investors to retreat from the pools.

Investors are still becoming increasingly bearish on so-called managed futures hedge funds, which typically use computer algorithms to follow trends in asset prices.

Such hedge funds have lost money on average over the past two years, as market sentiment swung from positive to negative based on the perceived health of Europe. Net investor demand for managed future funds plunged to 7 percent from 37 percent a year ago, Credit Suisse said.

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