Europe’s private banks make cautious return to hedge funds

Europe’s private banks rushed at every exit available to withdraw from hedge funds in the crunch, redeeming directly from portfolios, selling funds of hedge funds, draining bank platforms and offloading stakes privately.

Advisors to Europe’s wealthy regarded some managers’ reputation as mud at the time, angered chiefly by the widespread curbing or complete banning of withdrawals, and the $65bn fraud of Bernard Madoff.

But some industry practitioners say, two years since the crisis ended, the allocators are conducting preliminary due diligence on managers again, and some studies suggest they are also injecting cash.

Sebastian Dovey, managing partner at Scorpio Partnership, says: “Private banks are regaining appetite for alternatives and, indeed, hedge funds. In the most recent asset allocator survey we conducted we saw that, while alternative levels have not returned to pre-crisis and pre-Madoff levels, the general allocation has increased significantly over the last two years.

“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.

“Additionally, one third of the survey respondents were looking to further increase their alternatives allocation in the future [and] within the alternatives class, hedge funds still dominate with almost 60% of alternative allocations being hedge funds.”

It is quite a turnaround from immediately following the crunch.

Marina Lewin (pictured), managing director and global head of sales at BNY Mellon Alternative Investment Services, says: “Particularly high net worth investors lost a bit of trust in general 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 dearth 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, and in a zero interest rate environment it will come to a point when people have to make returns, and 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 are seeking 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 the high net worth segment will start to come back, too, but slowly.”


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