Europe Turns Hedge-Fund Hotspot as Economic Growth Picks Up

  • Hedge funds focused on region get back-to-back monthly inflows
  • Loeb says Third Point’s exposure to Europe highest since 2010

Market's Climbing Bubble Mountain, Says Grisanti

Europe is on a mini-streak with hedge-fund investors as the prospect of faster economic growth and fading political risk help restore confidence in the region.

Money pools investing across Europe attracted additional capital for the second straight month in June, following a 12-month stretch in which almost $16 billion was pulled out, according to data compiled by eVestment. The continent’s success contrasts with Asia and the U.S., where investors have pulled money from hedge funds.

Hedge funds focused on European equities, including Engadine Partners and Rye Bay Capital, have raised money this year, while billionaire Dan Loeb’s Third Point described the region as a “bright spot” last week and told investors that its exposure there is the highest since 2010.

The revival comes as a relief for a region that has seen more hedge funds closing down than starting up over the last 10 quarters because of poor performance, a lack of capital flows and rising regulatory and compliance costs. The trouble started during the debt crisis, which sparked years of political and macroeconomic uncertainty and poor corporate earnings growth.

All that changed in the first half of this year, according to Cutler Cook, who helps hedge-fund investor PAAMCO pick money managers.

“Suddenly Europe was being pitched as a best idea at U.S. conferences, the euro went on a tear and U.S. funds were getting involved in European corporate situations,” Cook said. “With the political and macro backdrop looking less uncertain now than at any other time in recent years, an upswing is good news for companies.”

The International Monetary Fund said in July that the euro area’s revival is “firming and becoming broad based” as lower energy prices, economic stimulus, stronger labor markets and a recovery in credit boost domestic demand. It predicts economic growth of 1.9 percent this year, up 0.2 points from an April forecast, and 1.7 percent in 2018.

One of the biggest beneficiaries of rising investor interest in the region are hedge funds betting on takeovers and company reorganizations. An increasingly buoyant economy and record-low interest rates in Europe boosted deal volumes to $566 billion in the first half of the year, up almost 10 percent from a year earlier, according to data compiled by Bloomberg. Globally, mergers and acquisitions declined by about 4 percent in the first half.

Engadine, Rye Bay

That’s drawn investors keen to profit from the upswing. Engadine Partners, a long-short equity fund started by Marcello Sallusti, started trading with internal capital in December 2016 and opened to external investors in January 2017. It now manages more than $300 million, according to a person with knowledge of the matter. The fund primarily focuses on European stocks and has gained 13 percent in the first half.

Rye Bay Capital, another European long-short equity fund, started trading with $10 million in January 2016 and has raised $260 million. Tower House Partners has increased its assets to $450 million from $30 million during the same period, the person said. Spokesmen for Engadine, Rye Bay and Tower House declined to comment.

The Eurekahedge European Hedge Fund Index rose 4 percent in the first half, beating the 2.7 percent for North American peers and 3.4 percent for global money pools. However, funds focusing on the region have lagged behind peers over the last five years.

In recent years, investor interest in Europe has ebbed and flowed. In 2015, for example, hedge-fund clients invested $22.7 billion in 2015, but pulled money last year. On top of that, valuations across Europe aren’t cheap and “when anywhere catches a cold -- be that the U.S. or China -- Europe is generally at risk of pneumonia," Cook said.

For now, Europe stands out in terms of attracting investors, who have invested a net $2.5 billion in funds focusing on the region this year, while pulling $7.5 billion from the U.S. and $5.8 billion from Asian money pools, according to eVestment.

Money flows aren’t limited to hedge funds. Exchange-traded funds focusing on European countries have raised $39 billion this year, according to data compiled by Bloomberg. Bond funds domiciled in Europe gathered a net 29 billion euros ($34 billion) in June, the second-highest monthly inflows since Morningstar started to publish the data in 2007.

Despite the recent inflows, investors are still underweight in euro-zone assets, according to Alberto Gallo, head of macro strategies at investment firm Algebris UK.

Investors had been concerned that this year’s French national election would disrupt markets, though that’s no longer the case, Gallo said. Algebris continues to be long on the euro and European assets, he said, adding that a victory for German Chancellor Angela Merkel in her country’s election in September could boost values further.

“Markets haven’t yet priced in the full upside of a Macron-Merkel combination and the stimulus which could come from it," he said.

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