Fund regulations

Hedged Out of the Market

einhorn_president and co-founder of Greenlight Capital Inc., pauses during a Bloomberg Television interview in New York_Bloomberg_Getty Images
David Einhorn, the president and co-founder of Greenlight Capital.
  • Why it matters

    Why it matters

    Tough new regulatory hurdles in Europe are detering the creation of new hedge funds, which are important wealth generators.

  • Facts

    Facts

    • Only 259 hedge funds were set up in Europe in 2015, the lowest level since 2002, according to data firm Eurekahedge.
    • The total number of hedge funds based in Europe fell in 2015 from the previous year — to fewer than 4,000.
    • On average the hedge fund sector, which manages some $3 trillion globally, saw the value of its funds slump 3.5 percent last year.
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    Audio

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Erwin Kooij first thought about setting up his own hedge fund more than ten years ago. “I came into contact with a number of hedge funds when I worked as an analyst at ABN Amro,” he told Handelsblatt. But the Dutchman didn’t take the plunge until just over a year ago.

He refrained from complete independence though. He joined a platform that advises hedge fund managers on regulatory issues, distribution and other practical problems. Without that help, the process of setting up a fund is a very drawn-out and costly process, said Mr. Kooij.

It’s getting more difficult for newcomers to break into the business, especially in Europe, where increasingly tight regulations have made setting up a hedge fund more difficult.

Ever fewer managers want to take on the obstacles, according to figures from information provider Eurekahedge, which show that only 259 hedge funds were set up in Europe in 2015, the lowest level since 2002.

It hasn’t helped that hedge funds globally had one of their worst years in 2015, with a series of established players posting woeful results. Nearly 700 hedge funds closed up shop over the first nine months of the year.

Life has become more difficult for smaller and less established hedge funds since the 2008 financial crisis.

Europe has been worst hit. The total number of hedge funds based in Europe even fell in 2015 from the previous year — to fewer than 4,000. It’s a different story in other regions such as North America and Asia: According to Eurekahedge, more funds were set up than wound down there last year, so the overall number increased.

Analysts at Citigroup estimate that the costs of meeting the regulatory requirements for hedge funds with assets of up to $350 million (€323 million) increased by about 30 percent from 2014. That makes it impossible for such funds to turn a profit.

Regulatory hurdles aren’t the only problem in Europe. Newcomers are also struggling to gain the confidence of potential customers. The average sums collected by new hedge funds in Europe have declined, said Clayton Heijman, head of financial services company Privium.

“A few years ago newcomers started out with at least €50 million to €75 million, now it’s €20 million to €25 million”, said Mr. Heijman.

Life has become more difficult for smaller and less established hedge funds since the 2008 financial crisis, analysts said. Since then, the biggest hedge funds, which make up 11 percent of the companies in the sector, have accounted for 92 percent of assets under management, according to figures from financial data company Preqin.

“Everyone earned well from this casino, but today the lemon has been all squeezed out of juice.”

Ralph Koppay, Hudson-Rhine Consulting

There’s a further factor hampering the creation of new hedge funds: Banks also face tougher requirements. The so-called prime brokers that cater for hedge funds have become noticeably more selective and cautious when it comes to working with small and new hedge funds, said Sam Diedrich of U.S. investment firm Paamco, which invests in various hedge funds.

As a result, new entrants are resorting to help not just from fund platforms such as Privium but also from larger hedge funds such as Bluecrest and Man Group. This permits fund managers to implement their own investment strategies while using the infrastructure of the larger fund — for a fee.

It’s made setting up a new hedge fund more easy, said Mr. Kooij, who uses the Privium platform. “It gave us more time to focus on other things — such as researching potential investment targets.”

In some cases, new funds go on to make themselves fully independent. “The leap into the cold water on one’s own should become easier now,” said one fund manager, who still uses the platform but wants to wean himself off it soon. “That’s because the fund platform helped me to show that my strategy works.”

It’s not just newcomers that have struggled, however. Even well-established hedge funds disappointed their investors last year due to massive market volatility.

U.S. fund Greenlight Capital, whose president David Einhorn famously pointed out financial risks at Lehman over a year before the bank collapsed, had a disastrous 2015, slumping to a loss of 20.5 percent, investors said.

For Greenlight, whose fund has almost $12 billion under management, it was only the second loss in its 20-year history, after a 23 percent decline in 2008 during the financial crisis.

Other leading lights of the sector also did badly, including Bill Ackman with his Pershing Square fund and Larry Robbins with Glenview Capital.

On average the entire hedge fund sector, which manages some $3 trillion globally, saw the value of its funds slump 3.5 percent last year.

For Ralph Koppay of Hudson-Rhine Consulting, the problem is clear: “Since 2008, the world of financial markets has changed massively through interventions of central banks that are artificually propping up markets,” he said.

“Everyone earned well from this casino,” he added, “but today the lemon has been all squeezed out of juice.”

 

Katharina Slodczyk is Handelsblatt’s London correspondent. Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is the deputy head of Handelsblatt’s finance section. To contact the authors: slodczyk@handelsblatt.com, koehler@handelsblatt.com and landgraf@handelsblatt.com

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