The first edition of the Eurekahedge European Hedge Fund
Directory contains information on more than 500 single manager
hedge funds that conform to the arbitrary definition of either:
- The manager physically located in Europe (irrespective
of geographic execution of strategy);
- Or the manager is physically located outside of Europe
but the strategy is executed in Europe
Funds by Strategy
As shown in figure 1 the most popular strategy for European
hedge funds is Long/Short Equities with nearly half (44%)
of managers executing this strategy. Tying for second and
significantly behind, are CTA/Managed Futures and Relative
Value/Market Neutral at 12% each. This conforms to the general
breakdown of hedge fund strategies worldwide; though CTA/Managed
Futures command a slightly greater market share in Europe
than the U.S. or Asia.
Fixed Income (including Debt), Macro, Event Driven, Multi-Strategy
and Convertible Arbitrage each share roughly equal market
share, approximately 5%. Assets dedicated to arbitrage strategies
have decreased slightly over the past year due to a lag in
performance and the flow into superior performing CTAs and
Managed Futures funds. The funds are split by strategy as
shown in Fig 1.
Figure 1: Funds by Strategy
Funds by Geographical Location of the Manager
The majority of European hedge fund managers are based in
Europe - nine of out ten managers are physically based in
Europe. The remaining managers are located primarily in the
Americas. Table 1 shows the geographical location of managers.
Table 1: Geographical Location of Hedge Fund Managers
|Location of Manager
||Percent of Funds
|Europe (including Russia)
|By Country/Area, within Europe
Of those based in Europe, the vast majority are in The British
Isles (comprising of United Kingdom, Channel Islands, and
Republic of Ireland). France has the next highest concentration
of single manager hedge funds, followed by Switzerland and
the Nordic Region. For lifestyle reasons, it is unusual for
the fund manager to be based in the location where the fund
Figure 2: Geographical Location of Managers within Europe
London is home to one of the largest concentration of hedge
fund investors in the world. That, coupled with the availability
of talent coming from The City, the ease to visit companies
or travelling management teams and a supportive regulatory
environment makes it the ideal location for a hedge fund.
Funds by Region where Strategy is Executed
Over 80% of managers execute either a global strategy or
a European exclusive strategy. Asia (Japan, South Korea, Hong
Kong, Singapore and Australasia) is the third most popular
strategy focus (10%), followed by Emerging Markets (5%) and
The Americas (3%). The split by region where strategy is executed
is shown in Figure 3.
Figure 3: Funds by Region
Average Asset Size, by Geographical Location of Manager
Figure 4 indicates there is a wide spread in average size
of assets under management by single manager hedge funds per
specific country - ranging from over $35B for United Kingdom
to sub $100M for Austria. With most of the money invested
in European hedge funds coming from Europe, the managers that
are closest to investors (ie London, Paris and Geneva) raise
the most assets. This makes sense in a time when investors
are under pressure to meet frequently and closely monitor
their managers for potential style drift or blow-ups.
It is interesting to see that Ireland, long associated with
the back office, has a significant amount of capital under
management in hedge funds. Like Singapore for Asian hedge
fund managers, this may have to do with "life-style"
developments - managers, specifically ones with a family,
coming from institutional backgrounds have grown tired of
working in The City of London and prefer a quieter working
Figure 4: Total Asset Size by Geographical Location of
The Administrator market for European hedge funds is both
fragmented and consolidated. The actual number of different
Administrators used is high at 56, making the supplier base
quite fragmented. However, the top 5 Administrators control
nearly half the market share (based on number of funds).
We believe that consolidation is inevitable amongst Administrators.
While the business has become commoditised, some firms are
attacking in a three-pronged fashion. First, they are building
their brand to gain greater recognition and reputation amongst
hedge funds; second, they generate efficiencies and savings
through economies of scale and scope; finally, they expand
into more profitable parts of the hedge fund service value
chain (like custodianship and seeding).
There is a need for niche players, but they must offer a
compelling value proposition to hedge funds to justify their
Market share is extremely concentrated with two Prime Brokers
controlling approximately half the market (based on number
of funds). The actual number of different Prime Brokers used
by European hedge funds is 27. In some cases, one hedge fund
will engage more than one Prime Broker.
We believe that the competition will steadily gain market
share from the "Big Two." We expect to see new entrants
as Investment Banks and others look for a slice of this profitable
Domicile and Listing
Unsurprisingly, most hedge funds are domiciled in the Cayman
Islands. From Table 2 we see that well over half of European
hedge funds are domiciled there; which is consistent with
North American and Asian strategy hedge funds. This is followed
by Ireland, Bermuda and British Virgin Islands.
Table 2: European Hedge Fund Domicile - Top 4 Countries
||Percentage of Hedge Funds
|British Virgin Islands
Among European hedge funds, about 60% are listed on an exchange.
Due to the ease of listing on the Irish Stock Exchange, it
is the market leader with 86% of qualifying funds listing
there. There is no meaningful second.
Hurdle Rate and High Water Mark
The existence of hurdle rates and high water marks are perceived
by many investors as being synonymous with hedge funds.
However, about three-quarters of European hedge funds do
not have a hurdle rate. Clearly, most fund managers believe
they are entitled to a cut of any positive return they generate.
And the investors are compliant.
For the high water mark, it's a different matter; with about
90% of funds having a high water mark.