European private banks make cautious return to hedge funds
Allocators say they will allocate to hedge funds again, but only to those that meet strict criteria.
Europe’s private banks rushed at every exit available to withdraw from hedge funds during the credit crunch, redeeming directly from portfolios, selling funds of hedge funds, draining bank platforms and offloading stakes privately.
Some managers’ reputations suffered at the time, with investors angered by the widespread curbing or complete banning of withdrawals, as well as the $65bn Madoff scandal.
But some industry practitioners say two years since the crisis ended, the allocators are conducting preliminary due diligence on managers again.
Some studies suggest they are also injecting cash.
Sebastian Dovey, managing partner at researchers Scorpio Partnership, says: “Private banks are regaining appetite for alternatives and, indeed, hedge funds.
“The average balanced portfolio alternative allocation is back up to 17% for the second quarter of 2011, in contrast to just 7% in the fourth quarter of 2009.
“In addition, one-third of the survey respondents were looking to further increase their alternatives allocation in the future. Within the alternatives class, hedge funds still dominate, with almost 60% of alternative allocations being hedge funds.”
It is quite a turnaround compared to what happened immediately after the credit crunch.
Marina Lewin, managing director and global head of sales at BNY Mellon Alternative Investment Services, says: “In particular, high-net-worth investors [HNWIs] lost a bit of trust in the financial system.
“They are slowly starting to come back, but not overwhelmingly. The HNWIs have come back to a limited extent – and cautiously.”
Industry practitioners highlight a lack of healthy risk-adjusted returns available from other asset classes as a key reason for the renewed interest.
Lewin says: “A private banker’s job is to ensure their clients are investing in a risk-managed, transparent manner. In a zero-interest rate environment, it will come to a point when people have to make returns. When things settle down a bit in markets, they will want to take more risk, allocating to hedge funds.”
Ben Funk, head of research at fund of funds, Liongate Capital Management, says: “Although private banks are not yet allocating, they are doing a lot of due diligence and getting offerings ready.
They seek more hedge strategies as debt and equity seem frothy, with European sovereign issues and growth in China and growth – or no growth – in the US.
“It is our expectation that the high-net-worth segment will start to come back, too, but slowly.”
As private bank clients renew their interest in hedge funds, Dovey says fund managers would be wrong to forget the investor group responsible for nurturing many of them.