The Europe Hedge Fund 50
Easy money policies have propelled some European managers to double-digit gains and forced others to find new opportunities.
It pays to be in the middle of an economic trouble spot especially when you are a hedge fund manager combing the ground for mispriced assets. At least that has been the case since last year for the fastest-growing funds in the Europe 50 annual ranking of the largest Europe-based hedge fund firms.
Take Cheyne Capital Management in London. Cheynes total assets rose by a whopping 56.1 percent last year, about half of which came from performance and half from new investor capital. With $6.4 billion in assets, the firm is No. 16 in the Europe 50, up from No. 23 lastyear. Jonathan Lourie, CEO of Cheyne, says there were quite a few bargains that arose from Europes economic turmoil. Banks across the Continent have left a gap in lending and financing, and Cheyne has been quick to jump on such areas as mezzanine financing of real estate, filling in where banks no longer tread. Adaptability, he says, is key.
I look at the markets as a coiled spring, says Lourie. Particularly in credit, you have to be able to pounce on dislocations.
The managers of Europes largest hedge funds are finding that in todays unstable markets they have to be ready to adapt to quick changes, turning their investment tactics around on a euro cent. Europes debt crisis and the resulting monetary policy have netted new opportunities for credit and equity funds in particular, and fueled double-digit growth in these strategies. On the other hand, with interest rates around the world hovering around zero, global macro funds have had to find new trading tactics. And managers of commodity trading adviser funds, which profit from following clear-cut trends in markets, have begun to look beyond the trend-following strategy after a tough 2012, brought on at least in part by central banks providing liquidity that may have saved some markets from dramatic highs orlows.
Total assets in the Europe 50 rose to $343.5 billion at the start of 2013, up from $318.9 billion at the start of 2012. The 7.7 percent increase is indicative of strong gains on the part of those that played the markets well; overall capital flowed out of hedge funds in Europe last year. The net outflow was $1.5 billion in 2012, according to figures from the research firm BarclayHedge. Capital was still leaving European hedge funds in the first four months of 2013, with $1 billion in net outflows year to date through the end of April.
Most European hedge fund managers had to revise their expectations after the European Central Bank began its two Long-Term Refinancing Operation rounds in December 2011 and February 2012, providing low-interest loans to ailing euro zone banks. The two LTRO roundsbrought as much as 800 billion ($1 trillion) in excess liquidity to Europes banking sector. Equity markets soared out of their recessionary slump after the second round, so long-only investors cheered while those holding short positions suffered.
Distressed managers were disappointed that the banks no longer needed to stage a massive sell-off of assets at bargain basement prices, as had been widely expected. Those that showed the best performance figures last year tended to be successful in stock and credit picking close to home, scoping out bargains that arose from what many see as an unprecedented global experiment. Never before, after all, have central banks all over the world infused the markets with so much cheap capital at the same time.
Among the individual funds, only RWC Partners rose more than Cheyne Capital. RWCs assets shot up 77.5 percent to $1.6 billion in 2012, enabling the firm to move up nine places, to No. 39 from No. 48 last year. Part of the growth came from a new global equity fund and an offshore version of RWCs Europe-focused activist fund.
Elsewhere on the list, however, mid-double-digit growth figures were common. GAM, No. 5 this year and last year, grew its assets by 46.3 percent. The activist hedge fund firm Cevian Capital, No. 10, experienced a 48.9 percent jump in assets. Its flagship fund returned about 20 percent, according to people familiar with the fund, but the firm also received an infusion of capital, especially from North American pension funds.
On the downside, some of the dips in European assets last year were headline news, especially the declines in the rival commodity trading adviser titans Man AHL (part of Man Group, which dropped to No. 3 from No. 1 last year) and Winton Capital Management (No. 4, down from No. 3). Each paid out somewhat more than $1 billion in redemptions when it became clear to investors that CTA funds, which profit from spotting and followingspecific market trends, were suffering from a lack of clear market movements to follow in 2012.
But for a fund like Cevian, which trades individual stocks, the markets of 2012 and 2013 have been a vindication of the preceding years. Cevian had been using the downturn in the European stock markets to buy companies with management problems but good potential to recover. Fundamentals went out the window after 2008, says Lars Frberg, a co-founder and managing partner of Cevian in London. That was a goodenvironment for us to make new investments. It was doubly good for an activist equity fund, he says, because companies they bought had a greater sense of urgency about the need to turn their fortunes around.
Cevian acts as more of a turnaround adviser than an activist of the Carl Icahn or William Ackman school. Rather than engaging in hostile proxy battles, the firm invests in companies where the management is receptive to fund managers advice. The postcrisis period created a greater-than-usual sense of urgency among most companies about the need to make changes and cut costs. Those periods of cost cutting tend to be followed by very good years, says Frberg.
Prashant Kolluri, managing director of hedge funds at Investcorp in New York, an alternative investment manager that oversees $4.5 billion in assets, also saw some seriously undervalued European equities at the beginning of 2012. Investcorp has invested in European hedge fund managers since 1996 and now has about 30 percent of its hedge fund portfolios invested with European managers. But Investcorp has made some adjustments in its allocations. In early 2012 the firm had been avoiding long-short equity strategies, which were down 4.39 percent in 2011, according to HedgeFund Intelligence. That thinking has changed. Kolluri also believes that discretionary macro is among the most viable strategies in the current markets.
The big question for investors is what do you do with your fixed-income portfolio when bond yields are so low, says Kolluri. Macro, he says, will be a beneficiary of investors moving out of fixed income, because a macro fund manager can express his views in a variety of ways in currencies, equities or commodities, by going long or short, with few constraints.
Alan Howard, co-founder of Brevan Howard Asset Management in London, which shot up to No. 1 with $40 billion in assets, predicted earlier this year in an investor letter that 2013 will be good for the global macro strategies that his firm employs. Brevan Howards assets increased by 17 percent last year, with the biggest gains coming from its credit strategy, up 15.3 percent, and its emerging markets strategies, up about 14percent, according to HedgeFund Intelligence. The emerging-markets strategies have declined this year, but the credit strategy was up 5.6 percent throughmid-June.
The flagship Brevan Howard fund has seesawed in recent years. It rose more than 18 percent in 2009, dipped to 1 percent in 2010, then gained just over 12 percent in 2011 only to rise by a modest 3.9percent in 2012. This year the fund is off to a winning start again, rising 7 percent through the end of May.
The gains have required a certain degree of rethinking the way the firm approaches macro, says Nagi Kawkabani, a founding partner at Brevan Howard. Weve stayed true to our macro framework, which means that to a large extent monetary policy is the primary determinant of our positioning, he says. But with interest rates hovering close to zero, the tools that Brevan Howards managers use have changed somewhat over the past two to three years. More recently, Kawkabani says, weve had to express macro views to a larger extent than in the past through things like FX and equityindex exposures.
Cheyne Capital has also branched out. When Lourie and Cheyne president Stuart Fiertz started the firm in 2000, the main strategy was convertible bond investments. Now Cheyne is a multistrategy firm that specializes in corporate credit, event-driven, real estate debt, equity and equity-linked strategies. In addition to real estate lending, which thefund does mostly through residential mortgage-backed securities and direct lending to sponsors of real estate development, they have been shorting high-yield corporate debt in Northern European countries. A year and a halfago, says Lourie, the managers made a decision to be more active in equity strategies, so they brought in portfolio managers who are equity specialists: a team that had a great track record in Southeast Asian equities, a European midcap specialist and two seasoned global long-short managers.
When it comes to reassessment, however, none has had to do more than the commodity trading advisers after their bruising2012 and rocky 2013 so far. Like systematic macro funds, CTAs use algorithms, but in this case they set up programs designed to detect trends in a variety of markets and follow those trends. Because they take both short and long bets, following assets that are headed down as well as up, CTAs tend to perform well when markets are plunging. But they need clear trends, and 2012 was notablylacking in trends. The Hedge Fund Research Macro/CTA Index was down by 1 percent in 2012 and down again by 0.4 percent year-to-date through May 2013.
By now some investors might regret taking their money out of Winton Capital and Man AHL funds, a CTA strategy that makes up about 70 percent of Man Groups hedge fund assets. Both CTAs have shown some recovery this year so far, even though both lost money in May.
The flagship Winton Futures Fund was up 6.39 percent through May after a 3.56 percent fall in 2012. Winton Capital continues to invest in research, which is the backbone of any quant fund, but is alsobuilding up its other strategies.
Weve made money in some of our other strategies, says Matthew Beddall, chief investment officer at London-based Winton Capital. Weve been focusing a lot of attention on cash equity trading about 20 percent of the risk in our flagship fund is in cash equities.
The firm has also raised $265 million for its five-year-old long-only equity fund that is compliant with the Ucits scheme. Ucits funds allow hedge funds to broaden their investor base, as the funds set up under this directive can be marketed throughout the EU to both institutional and retail investors. The capital flows to Ucits funds have not been steady, but unlike with European hedge funds in general, overall demand surged for Ucits funds in the first quarter of this year, according to the European Fund and Asset Management Association. Net inflows were 130 billion for the quarter.
The Man AHL Diversified Fund rose 6.47 percent through May after declining 1.61 percent last year. Man Group, a listed company, has nearly tripled its cash reserves this year thanks to a decision from the U.K.s Financial Conduct Authority that recognizes the firm as not subject to the same capital buffer requirements as banks. While the firm could use the reserves for acquisitions or investor dividends, Emmanuel Roman, who became CEO in February, wants to put the capital to work in strengthening research capabilities so that Mans portfolio managers can take advantage of the kind of market opportunities that require deep digging.
What I can tell you is Im using some of my cash flow to invest in human capital, says Roman. Thats the most important element in making our models perform better. You cant stand still.
It pays to be in the middle of an economic trouble spot especially when you are a hedge fund manager combing the ground for mispriced assets. At least that has been the case since last year for the fastest-growing funds in the Europe 50 annual ranking of the largest Europe-based hedge fund firms.
Take Cheyne Capital Management in London. Cheynes total assets rose by a whopping 56.1 percent last year, about half of which came from performance and half from new investor capital. With $6.4 billion in assets, the firm is No. 16 in the Europe 50, up from No. 23 lastyear. Jonathan Lourie, CEO of Cheyne, says there were quite a few bargains that arose from Europes economic turmoil. Banks across the Continent have left a gap in lending and financing, and Cheyne has been quick to jump on such areas as mezzanine financing of real estate, filling in where banks no longer tread. Adaptability, he says, is key.
I look at the markets as a coiled spring, says Lourie. Particularly in credit, you have to be able to pounce on dislocations.
The managers of Europes largest hedge funds are finding that in todays unstable markets they have to be ready to adapt to quick changes, turning their investment tactics around on a euro cent. Europes debt crisis and the resulting monetary policy have netted new opportunities for credit and equity funds in particular, and fueled double-digit growth in these strategies. On the other hand, with interest rates around the world hovering around zero, global macro funds have had to find new trading tactics. And managers of commodity trading adviser funds, which profit from following clear-cut trends in markets, have begun to look beyond the trend-following strategy after a tough 2012, brought on at least in part by central banks providing liquidity that may have saved some markets from dramatic highs orlows.
Total assets in the Europe 50 rose to $343.5 billion at the start of 2013, up from $318.9 billion at the start of 2012. The 7.7 percent increase is indicative of strong gains on the part of those that played the markets well; overall capital flowed out of hedge funds in Europe last year. The net outflow was $1.5 billion in 2012, according to figures from the research firm BarclayHedge. Capital was still leaving European hedge funds in the first four months of 2013, with $1 billion in net outflows year to date through the end of April.
Most European hedge fund managers had to revise their expectations after the European Central Bank began its two Long-Term Refinancing Operation rounds in December 2011 and February 2012, providing low-interest loans to ailing euro zone banks. The two LTRO roundsbrought as much as 800 billion ($1 trillion) in excess liquidity to Europes banking sector. Equity markets soared out of their recessionary slump after the second round, so long-only investors cheered while those holding short positions suffered.
Distressed managers were disappointed that the banks no longer needed to stage a massive sell-off of assets at bargain basement prices, as had been widely expected. Those that showed the best performance figures last year tended to be successful in stock and credit picking close to home, scoping out bargains that arose from what many see as an unprecedented global experiment. Never before, after all, have central banks all over the world infused the markets with so much cheap capital at the same time.
Among the individual funds, only RWC Partners rose more than Cheyne Capital. RWCs assets shot up 77.5 percent to $1.6 billion in 2012, enabling the firm to move up nine places, to No. 39 from No. 48 last year. Part of the growth came from a new global equity fund and an offshore version of RWCs Europe-focused activist fund.
Elsewhere on the list, however, mid-double-digit growth figures were common. GAM, No. 5 this year and last year, grew its assets by 46.3 percent. The activist hedge fund firm Cevian Capital, No. 10, experienced a 48.9 percent jump in assets. Its flagship fund returned about 20 percent, according to people familiar with the fund, but the firm also received an infusion of capital, especially from North American pension funds.
On the downside, some of the dips in European assets last year were headline news, especially the declines in the rival commodity trading adviser titans Man AHL (part of Man Group, which dropped to No. 3 from No. 1 last year) and Winton Capital Management (No. 4, down from No. 3). Each paid out somewhat more than $1 billion in redemptions when it became clear to investors that CTA funds, which profit from spotting and followingspecific market trends, were suffering from a lack of clear market movements to follow in 2012.
But for a fund like Cevian, which trades individual stocks, the markets of 2012 and 2013 have been a vindication of the preceding years. Cevian had been using the downturn in the European stock markets to buy companies with management problems but good potential to recover. Fundamentals went out the window after 2008, says Lars Frberg, a co-founder and managing partner of Cevian in London. That was a goodenvironment for us to make new investments. It was doubly good for an activist equity fund, he says, because companies they bought had a greater sense of urgency about the need to turn their fortunes around.
Cevian acts as more of a turnaround adviser than an activist of the Carl Icahn or William Ackman school. Rather than engaging in hostile proxy battles, the firm invests in companies where the management is receptive to fund managers advice. The postcrisis period created a greater-than-usual sense of urgency among most companies about the need to make changes and cut costs. Those periods of cost cutting tend to be followed by very good years, says Frberg.
Prashant Kolluri, managing director of hedge funds at Investcorp in New York, an alternative investment manager that oversees $4.5 billion in assets, also saw some seriously undervalued European equities at the beginning of 2012. Investcorp has invested in European hedge fund managers since 1996 and now has about 30 percent of its hedge fund portfolios invested with European managers. But Investcorp has made some adjustments in its allocations. In early 2012 the firm had been avoiding long-short equity strategies, which were down 4.39 percent in 2011, according to HedgeFund Intelligence. That thinking has changed. Kolluri also believes that discretionary macro is among the most viable strategies in the current markets.
The big question for investors is what do you do with your fixed-income portfolio when bond yields are so low, says Kolluri. Macro, he says, will be a beneficiary of investors moving out of fixed income, because a macro fund manager can express his views in a variety of ways in currencies, equities or commodities, by going long or short, with few constraints.
Alan Howard, co-founder of Brevan Howard Asset Management in London, which shot up to No. 1 with $40 billion in assets, predicted earlier this year in an investor letter that 2013 will be good for the global macro strategies that his firm employs. Brevan Howards assets increased by 17 percent last year, with the biggest gains coming from its credit strategy, up 15.3 percent, and its emerging markets strategies, up about 14percent, according to HedgeFund Intelligence. The emerging-markets strategies have declined this year, but the credit strategy was up 5.6 percent throughmid-June.
The flagship Brevan Howard fund has seesawed in recent years. It rose more than 18 percent in 2009, dipped to 1 percent in 2010, then gained just over 12 percent in 2011 only to rise by a modest 3.9percent in 2012. This year the fund is off to a winning start again, rising 7 percent through the end of May.
The gains have required a certain degree of rethinking the way the firm approaches macro, says Nagi Kawkabani, a founding partner at Brevan Howard. Weve stayed true to our macro framework, which means that to a large extent monetary policy is the primary determinant of our positioning, he says. But with interest rates hovering close to zero, the tools that Brevan Howards managers use have changed somewhat over the past two to three years. More recently, Kawkabani says, weve had to express macro views to a larger extent than in the past through things like FX and equityindex exposures.
Cheyne Capital has also branched out. When Lourie and Cheyne president Stuart Fiertz started the firm in 2000, the main strategy was convertible bond investments. Now Cheyne is a multistrategy firm that specializes in corporate credit, event-driven, real estate debt, equity and equity-linked strategies. In addition to real estate lending, which thefund does mostly through residential mortgage-backed securities and direct lending to sponsors of real estate development, they have been shorting high-yield corporate debt in Northern European countries. A year and a halfago, says Lourie, the managers made a decision to be more active in equity strategies, so they brought in portfolio managers who are equity specialists: a team that had a great track record in Southeast Asian equities, a European midcap specialist and two seasoned global long-short managers.
When it comes to reassessment, however, none has had to do more than the commodity trading advisers after their bruising2012 and rocky 2013 so far. Like systematic macro funds, CTAs use algorithms, but in this case they set up programs designed to detect trends in a variety of markets and follow those trends. Because they take both short and long bets, following assets that are headed down as well as up, CTAs tend to perform well when markets are plunging. But they need clear trends, and 2012 was notablylacking in trends. The Hedge Fund Research Macro/CTA Index was down by 1 percent in 2012 and down again by 0.4 percent year-to-date through May 2013.
By now some investors might regret taking their money out of Winton Capital and Man AHL funds, a CTA strategy that makes up about 70 percent of Man Groups hedge fund assets. Both CTAs have shown some recovery this year so far, even though both lost money in May.
The flagship Winton Futures Fund was up 6.39 percent through May after a 3.56 percent fall in 2012. Winton Capital continues to invest in research, which is the backbone of any quant fund, but is alsobuilding up its other strategies.
Weve made money in some of our other strategies, says Matthew Beddall, chief investment officer at London-based Winton Capital. Weve been focusing a lot of attention on cash equity trading about 20 percent of the risk in our flagship fund is in cash equities.
The firm has also raised $265 million for its five-year-old long-only equity fund that is compliant with the Ucits scheme. Ucits funds allow hedge funds to broaden their investor base, as the funds set up under this directive can be marketed throughout the EU to both institutional and retail investors. The capital flows to Ucits funds have not been steady, but unlike with European hedge funds in general, overall demand surged for Ucits funds in the first quarter of this year, according to the European Fund and Asset Management Association. Net inflows were 130 billion for the quarter.
The Man AHL Diversified Fund rose 6.47 percent through May after declining 1.61 percent last year. Man Group, a listed company, has nearly tripled its cash reserves this year thanks to a decision from the U.K.s Financial Conduct Authority that recognizes the firm as not subject to the same capital buffer requirements as banks. While the firm could use the reserves for acquisitions or investor dividends, Emmanuel Roman, who became CEO in February, wants to put the capital to work in strengthening research capabilities so that Mans portfolio managers can take advantage of the kind of market opportunities that require deep digging.
What I can tell you is Im using some of my cash flow to invest in human capital, says Roman. Thats the most important element in making our models perform better. You cant stand still.
