Hedge Funds Are Shuttered as Investors Go With Europe's Big Gunsby
Closures exceed hedge funds started for first time in 15 years
Three-quarters of funds closed managed $150 million or less
For smaller hedge funds and startups, Europe wasn’t the place to be in 2015 as mounting costs and shrinking fees prompted the industry to contract in the region for the first time in at least 15 years.
While money flowed into multibillion dollar operations such as Lansdowne Partners UK and Marshall Wace, businesses including Armajaro Asset Management, run by Oliver Denny, and Lucidus Capital Partners were among those that shuttered funds. About 75 percent of the 294 European funds that closed last year managed $150 million or less, according to industry tracker Eurekahedge.
Money managers were hurt by the rising cost of complying with regulations such as the Alternative Investment Fund Managers Directive, which also prompted some of those preparing to start new firms to reassess their plans. A total of 259 funds opened their doors for the first time in Europe last year, the lowest number since 2002, Eurekahedge data show. By comparison, more hedge funds started than closed in both North America and Asia during the year.
"In the challenging landscape we are in, one message comes through loud and clear: The incremental capital, if anything, is flowing to the larger players," said Okan Pekin, global head of investor services at Citigroup Inc. “Startups are finding it more difficult and banks are concentrating their limited financing resources on the larger players."
The number of hedge funds in Europe has fallen to less than 4,000 from an all-time high of 4,023 at the end of 2014 even as assets under management reached a record $528 billion at the end of November, with investors pouring a net $33 billion into funds during the 11 months. They pledged $19.3 billion in the whole of 2014.
Peter Astleford, a partner at law firm Dechert, said regulatory approval from the Financial Conduct Authority to start an investment management firm in the U.K. was relatively slow in 2015. While existing managers are coping with new regulatory obligations in Europe, many will have put expansion and new product development on hold while they first became comfortable with the new rules.
The year got off to a bad start for many money managers when the Swiss National Bank abandoned the franc’s cap against the euro last January. The rout in commodity markets and a selloff in Chinese equities later in the year added to the losses of even the biggest money managers.
Comac Capital, a London-based hedge fund run by Colm O’Shea, returned money to clients after it lost 8 percent as a result of the currency turmoil. Edinburgh-based Martin Currie Investment Management shut a 15-year-old hedge fund that bet on Japanese stocks.
Pressure on Fees
Hedge funds typically charge a 2 percent management fee and take a 20 percent cut from the performance they generate. That fee level has dropped to 1.2 percent and 13.9 percent respectively in Europe, Eurekahedge data show.
Money managers overseeing less than $350 million saw compliance costs rise by 31 percent in 2014 and may not make a profit just by charging the standard management fee of 2 percent, according to a report from Citigroup Inc. Seven in every 10 hedge funds in Europe manage less than $200 million, according to Eurekahedge.
“A small asset base, combined with a lackluster performance for European mandates in 2014 and the diminished prospects of incentive-based fees, has forced a significant number of fund managers to throw in their towels,” said Mohammad Hassan, a senior analyst at Eurekahedge.