European Hedge Funds Research Articles

The European hedge funds industry: An empirical analysis of performance, liquidity, and growth

While the performance of hedge funds has grabbed much attention from researchers, a few studies have been conducted on the drivers of hedge fund liquidity and performance (Shaub & Schmid, 2013). This study proposes new approaches to investigate the effect of share restrictions on European hedge fund performance and liquidity. We run different regressions of 1) returns, 2) flows, and 3) exposure to market liquidity risk on share restrictions, managerial incentives, and a set of control variables as independent variables. Using a sample of 1423 European hedge funds, our results suggest that restrictions imposed by European hedge funds add economic value to investors. Furthermore, we find that European hedge funds with strong share restrictions take on lower liquidity risk. There is a weak difference in liquidity risk exposure across directional European hedge funds with and without share restrictions. In addition, European hedge funds’ experience, large outflows during a crisis, and all share restrictions do not seem to be significantly related to funding flows in the crisis period, as well as in times of non-crisis. Finally, only the groups of young funds are associated with significant funds exposure to market liquidity risk

Management of Investment Funds Financial Fragility

The aim of the research is to characterize the main factors of in vestment funds financial fragility (concentration, interconnected ness, yield search, homogeneous strategies, procyclical activity, lo substitutability, growth of leverage, low liquidity) in the Euro area Correlation coefficients with different strategies and the stock inde EURO STOXX 50 were used to check the presence of procyclicality o market behavior and homogeneity of investment funds strategie on the example of European hedge funds. In article was proposed t calculate a financial fragility index as a simple average of a leverag multiplier, a liquidity mismatch and an indicator of the intercon nectedness of funds with other financial institutions.

European hedge funds: share restrictions, incentives and performance

We propose new approaches to examine the relation between alternative share restrictions and both funds' performance, and other features of European hedge funds. Using a sample of 1616 European hedge funds, our results suggest that all types of share restrictions allow European hedge fund managers to efficiently manage their assets in times of non-crisis as well as during crisis periods. Furthermore, we find that funds with stronger share restriction are associated with lower level of average asset illiquidity and the performance is an important determinant of European hedge funds’ choice of share restrictions. Finally the choice of share restriction is also related to other factors such as the managers compensation structure, fund’s age, dividend policy, leverage.

Volatility forecasting in practice: exploratory evidence from European hedge funds

This note provides survey evidence of volatility forecasting practices in a number of European hedge funds. Results confirm the academic consensus that option-implied volatility (IV) is a commonly used risk management and volatility forecasting tool among “sophisticated” investors, but also highlight the great popularity of simple historical models, whereas stochastic models are of lesser relevance. Sensible, market sentiment capturing forecasting solutions that reduce model complexity are not only demanded, but are also already implemented by a number of practitioners. The development of multi-model forecasting solutions that combine historical and IV information into a reliable predictor of volatility appears to be a promising path for research.

Measuring Risk with COGARCH(p,q) Models

In this paper we introduce a multivariate Independent Component COGARCH(p,q) model for financial time series. We determine optimal portfolio weights obtained as a solution of different static asset allocation problems. Empirical analysis is conducted on two datasets. The first is composed by 154 European hedge funds tracking the performance of the FTSE100 Index while the second contains the members of FTSE100. The performances of different strategies are investigated from an out-of-sample perspective.

Do European hedge fund managers time market liquidity?

We propose two approaches to examine whether European hedge fund managers can time market liquidity. Using a sample of 1616 European hedge funds, we find evidence of liquidity-timing. More importantly, this ability adds economic value to investors. Thus, it represents valuable managerial skill and a major source of European hedge funds’ performance. Also we show that the majority of these funds demonstrate liquidity-timing ability especially during liquidity crisis. Finally, it emerged that our main evidence of liquidity-timing remains significant after controlling for market-timing and volatility-timing.

Explain the Attractiveness of Alternative UCITS: Reasons and Consequences of Both a Growing and a Demanding Market

The hedge fund industry suffers for several years from a controversial reputation. This perception has been also accentuated through troubles triggered by the recent crisis which bring a global distrust towards such type of investment vehicles. Consequently, regulator seeks permanently to accelerate its reinforcement trend, in order to ensure a high level of investors’ protection. European hedge funds are particularly impacted by regulatory burden under the AIFMD recently implemented, but managers can opt for a UCITS structure, previously non-adapted to hedge funds but better matching current market expectations.This paper aims to introduce the global growing trend of alternative UCITS, also called “Newcits”, by searching to explain the reasons managers especially practice their strategies in the most constraining UCITS vehicle, and illustrating specific items related to investors which assert the competitiveness and the attractiveness of onshore hedge funds UCITS.

European Hedge Funds Industry: An Overview

To shed more light on the hedge fund industry, we examine the characteristics and performance of European hedge funds that invest exclusively in Europe. Our sample of 1,905 hedge funds reveals that 85.42% of the management companies are based in Europe, with a particular dominance in the United Kingdom. Assets under management have grown significantly over the past decade, in spite of international financial and European sovereign debt crises. In addition, we find that, of the hedge funds that use leverage, 52% follow a Long/Short Equities strategy. Overall, European hedge funds investing exclusively in Europe seem to perform better than North American hedge funds, and are becoming strong competitors to North American funds. <b>TOPICS:</b>Private equity, developed, performance measurement, equity portfolio management

Hedging its Bets: The UK and the Politics of European Financial Services Regulation

Some argue that European financial services regulation is witnessing a shift from a ‘market-making’ to a ‘market-shaping’ paradigm after the global financial crisis. This so-called ‘new’ political economy explanation stresses the role of ideas to understand this change. We consider this claim by providing an in-depth examination of recent European hedge fund legislation from the perspective of two key ‘market-making’ coalition members: the UK government and the hedge fund industry. We accept that the legislation represents a set-back for the ‘market-makers’ but question whether it represents a victory for the ‘market-shapers’. Moreover, we cast doubt on the causal role of ideas, calling for a domestic politics approach.

The Conceptual Underpinnings of Onshore Hedge Fund Regulation: A Global and European Perspective

An informed decision on the rationale and contents of hedge fund regulation presupposes a matching of the various justifications for financial market regulation with the perceived risks and benefits of hedge fund investing and a discounting of those regulatory intervention rationales that cannot be shown to be of relevance to hedge funds. This article seeks to achieve a three-pronged objective: examine the applicability of the conventional rationales for financial markets regulation to hedge funds, in the light of their peculiar risks and benefits; inquire into additional, sui generis rationales of relevance to the regulation of European hedge funds; and examine some of the most frequently invoked objections to hedge fund regulation with a view to ascertaining whether these might cancel out the legitimate reasons why the industry could be the subject of normative intervention. It will be argued that macro-prudential, systemic considerations provide the main justification for hedge fund regulation, although the need to ensure the continuing contribution of hedge funds to the achievement of socio-economically beneficial objectives provides complementary arguments for a systematic public-policy response to the challenges thrown up by the industry's growth.

Have Hedge Funds Added Value During the Last 24 Months? A Comparison of Italian and European Funds of Hedge Funds

This paper studies the Performances of Italian Fund of Hedge Funds (FoHFit), in comparison with those of Italian Funds of Mutual Funds (FoFit) and of a sample of European Funds of Hedge Funds (FoHFeu). The first objective is to build a methodology able to both deal with a limited number of data referred to a specific period of time and to obtain a judgment about the value added to investors by the FoHFit Industry. The judgment will be supported by the comparison of the results of actual competitors (the Italian Funds of Funds) and of virtual competitors (the European Funds of Hedge Funds) in the same financial environment. The comparison between the young Italian Hedge Fund Industry and the European Hedge Fund Industry will be particularly significant to delineate sensitive improvement points. The general methodology adopted follows four phases: * Defining the financial environment in which the Fund Managers performed their activity * Selecting a sample of Funds for each group (FoHFit, FoHFeu and FoFit) that was able to add value in the defined financial environment * Performing a risk/rewards analysis of these value added funds * Realizing a performance analysis of these funds to determine which risk factors and which strategies best explain the results of these value added funds

The Performance Evaluation of Hedge Funds: A Comparison of Different Approaches Using European Data

The standard approach to the evaluation of funds assumes a normal return distribution and uses the variance as a measure of the funds risk. A few characteristics of hedge funds, such as the remuneration mechanism of the portfolio manager, make this assumption unacceptable and the traditional approach of Risk Adjusted Performance (RAP) must be revised before applying it to hedge funds. Some authors define a number of different RAP measures that attempt to overcome the problem related to the lack of normality: new RAPs are characterized by a more detailed return distribution analysis that does not consider only the first two moments of the distribution. A higher computational complexity may only be reasonable if selections founded on new RAPs permit to identify better investment opportunities than those selected with standard RAPs. This work analyses different approaches proposed with a view to calculating the RAP for hedge funds and evaluates advantages and limits of each proposed measure. An application of these measures to the European hedge funds market is proposed in order to demonstrate the usefulness of new approaches. An empirical analysis studies differences in funds classification based on different measures and demonstrates that the standard RAP approach is unable to identify the best performing hedge funds.

Taking a Close Look at the European Fund of Hedge Funds Industry

Given the increasing importance of funds of hedge funds in the development of the hedge fund industry and the cost-intensive nature of multi-manager structures, investors are questioning whether FoHF add value to an extent that justifies the extra layer of fees induced by their activity. To answer these questions from a European perspective, Edhec Risk and Asset Management Research Centre carried out a survey of the practices of European hedge fund multi-managers. This survey focused on examining the following three dimensions that are commonly perceived as the main sources of added value by multi-managers, namely fund selection, asset allocation and portfolio construction, and reporting and investor information. The authors report the results of this survey and shed some light on the causes of the gap between practitioner and academic perceptions with regard to the approach followed by hedge fund multi-managers. They conclude that the institutionalization of hedge funds, and the move from absolute performance to diversification benefits, cannot simply be understood as a change in scale and client objectives, but more as a profound modification of investor requirements impacting several dimensions of the industry.

European Hedge Funds

The European hedge fund industry has developed somewhat differently from the industry in the United States. In Europe, there are considerable geographic differences in terms of regulatory scrutiny, tax regimes, investor demand, and hedge fund and fund of funds locations. The two most prominent countries are Switzerland and the United Kingdom. Switzerland, home to the first fund of hedge funds in the world, is still the preferred location for some of the largest funds of funds. It has a long history of private wealth channeled to the hedge fund industry. The United Kingdom is the preferred location of hedge fund managers setting up investment management companies. Analysis of the current industry characteristics focuses on geographic and strategy breakdowns, industry growth, distribution of fund size, and fee structure. The performance statistics of the two largest strategies of European hedge fund managers—long-short equity and managed futures—are examined.

German hedge fund legislation: modernised but still old-fashioned

On January, 1st 2004 the new German Investment Act (Investmentgesetz – “InvestG”) has entered into force and has established a new legal frame for funds. Especially hedge funds are regulated by German law for the first time. Nevertheless the solutions, used to establish hedge fund investments in Germany in the past, remain legal and it is argued that they will continue to play a practical role. The new InvestG on the one hand modernises German law, but on the other hand still clings to a somewhat old-fashioned regulatory approach. At the same time there are efforts at the European level to harmonise European hedge fund legislation. As a result an analysis of the German hedge fund regulation has to deal with three different, partly overlapping regimes: A past, that is still not bygone (II.), a present which is still not modern at all (III.), and a near future that will bring more changes and probably lead to an up-to-date regulation (IV.). After an introduction to these three regimes, I shall conclude with a short summary pointing out the main deficits of the new German legislation (V).

European Hedge Funds

Observing that the European hedge fund industry has grown exponentially in the last few years, the author discusses the structure of the industry and the reasons for its growth, noting several issues frequently cited as areas of concern for potential investors. He provides a description of the main European hedge fund strategies, an exposé of the key drivers of returns within a strategy, and a discussion of the outlook over the next 6 to 12 months.