Germans drop antagonism and warm to hedge funds

Germany, once widely regarded as the European nation most inimical to hedge funds, is now warming to the sector with allocators across the spectrum considering or actually making investments.

Germany’s investor community – from private banks to institutional investors including pension funds and family offices – are putting money into funds.

German institutional interest in offshore hedge funds has risen since the financial crisis, according to Thomas Hunger at Conservative Concept Capital ­Management (CCPM).

Hunger, who heads business development at the $1.5bn German-based investment management company, said boutique hedge fund managers who “proved good in stormy weather and can compete with global players “in a perfect storm” are expected to be successful attracting German institutional money.

Jeff Holland, managing director of $3.2bn fund of hedge funds Liongate Capital Management, agreed there has been a change of attitude.

German institutions now have a strong appetite for investing in hedge funds, he said, despite recognising “an anti-hedge fund rhetoric” common in the media and from government statements.

“German institutions, predominantly pension funds, believe hedge funds have an appropriate place in their portfolios and they are increasing allocations to hedge funds,” he said.

Roughly 20% of Liongate Capital Management’s investor base is German, including several of the 10 biggest German pension funds.

Earlier this year Bayerische Versorgungskammer (BVK), Germany’s largest pension fund with €50bn assets under management, gave hedge fund giant Man Group a €1.2bn managed account mandate.

Pascal Botteron, global head of the hedge and mutual fund investment group for Deutsche Bank Private Wealth Management, confirmed this interest.

German investor preferences have changed since the financial crisis with a surge of interest in Ucits hedge funds and managed accounts, he said.

These structures particularly appeal to German family offices and high net worth individuals keen on the liquidity and transparency terms offered, according to Botteron.

Some long-established family offices already invest in traditional offshore hedge funds, Botteron said, and have been doing so for several years. These family offices generally put money into ‘household’ hedge fund names with long track records, he added.

Fabrice Cuchet, head of alternatives and hedge funds at Dexia Asset Management, agreed the German market is bullish on alternative Ucits products as well as hedge funds.

Before the crisis it was difficult to sell hedge funds in Germany, he admitted, but said Germans now see hedge funds as a solution to persistent low interest rates and choppy equity markets.

“Before the crisis German investors were very reluctant to invest in hedge funds. What I have witnessed today is a more bullish market for asset gathering in Germany. They are looking for Ucits products, but they are also looking for diversification,” he said.

“They are looking for solutions. If I look at the asset strength of Dexia AM over the last 18 months, Germany is among the top five countries where we have gained the most,” he concluded.

Dexia Asset Management runs nearly $125bn in assets, of which $8bn is in hedge fund strategies.

Alongside rising institutional interest in offshore hedge funds and FoHFs, there has also been a steady rise of interest in Ucits-compliant hedge funds, according to observers of the German market.

For example, local institutional investor needs and demands were behind CCPM’s decision to launch its first Ucits III-compliant vehicle, the Athena UI Fund, in 2008. From an initial seed investment of €100m, AuM has risen to €341.84m.

This was followed by a second Ucits hedge fund in July 2009, the Time Alpha UI Fund. This now has assets of €92.43m. Both funds are domiciled in Germany and offer daily liquidity.

Most of CCPM’s assets are sourced from German investors including private banks, pension funds and insurance companies.

The German reversal is at odds with the latest report on European investment into hedge funds, the European Institutional Asset Management Survey 2011, which noted a dramatic decline in 2010.

European-based institutional investors shied away from investing into hedge funds in 2010, turning to fixed income and commodities investment instead, concluded the report, sponsored by Invesco.

The survey agreed with an earlier report from Mercer Investment Consulting showing the proportion of European pension funds planning to increase allocations fell compared with 2010.

Overall allocations to alternatives have increased marginally from 11.7% of allocations in 2009 to 12% in 2010, reported the survey.

But allocations to hedge funds shrank from 2.3% in 2009 to just 1.1% in 2010.

Commodities supplanted hedge funds in the alternatives sector, receiving on average 1.4% of allocations compared with 1% in 2009.

Fixed income has become the most popular asset class, representing on average 58% of European institutions’ allocations.

Equity allocations fell from 29% in 2009 to 27% in 2010.

The survey included responses from 148 European institutions managing €1.19trn of assets. This included 16 French institutions with €732bn, over half the total invested assets included in this survey, which may explain why hedge funds fared badly.

The French respondents allocated just 0.7% of their assets to hedge funds in 2010. By contrast, UK and Irish institutional investors allocated 3.7% to ­alternatives.

In 2009, 71% of the surveyed French institutions invested in hedge funds. In 2010 this figure fell to 43%. Similarly institutions in the Nordic region cut allocations to hedge funds with just 35% of them allocating, down from 72% in 2009.

Of the surveyed institutions, 40% invested into hedge funds in 2010, down from 47% in 2009.

Total assets managed in Europe grew to $19.8trn at the end of 2010, according to research from EFAMA. Institutional clients accounted for 68% of AuM. The UK, France and Germany accounted for two thirds of total assets at the end of 2009.