Investors ready to pour more money into hedge funds as EU battle over regulation postponed

News - Funds

Written by Ray Clancy

Wednesday, 17 March 2010 09:23

Investors expect to pour more money into hedge funds this year than they will withdraw for the first time since 2007, reflecting cautious confidence about the industry and the financial markets more broadly.

Last year investors were focused on trying to get their money back out of hedge funds but now they are more likely to take a risk, according to a survey by Deutsche Bank.

The majority of respondents said they expect to see more than $100 billion of net assets flow into hedge funds in 2010. That comes after two years of net outflows, with investors having withdrawn hundreds of billions of dollars more than they put into funds during 2008 and 2009 combined.

Not all funds will get a piece of the action, however. Some 80% of investors plan to shun those that locked up their money, froze assets or added so-called sidepockets, where bad assets go to die a slow death.

Despite investor exits last year, the level of industry assets recovered slightly thanks to positive investment performance. Hedge funds as a group were up 20% last year, after delivering their worst performance on record in 2008. Industry assets stood at $1.6 trillion at the end of 2009, up from $1.4 trillion in 2008, though below the 2007 peak of $1.9 trillion, according to Chicago data tracker Hedge Fund Research.

Investors say they are putting an increased amount of money with managers who focus on higher risk strategies such as equity long-short, emerging markets, and event-driven, which wager on companies going through mergers and other restructurings. Meanwhile, investors are sitting on less cash than a year ago, albeit still more than at the market's peak.

They are likely to be further encouraged by the news that controversial European Union legislation to curb the powers of hedge funds could be a lot weaker than expected amid furious criticism from the US and the UK that it would be protectionist and in contravention of a G20 agreement.

The Alternative Investment Fund Managers Directive was swiftly removed from the agenda of a meeting of top EU finance ministers yesterday and will now be tabled instead at next month’s G20 summit.

The AIFM directive, which seeks to regulate hedge funds and private equity across Europe, has been bitterly opposed by the UK which has seen it as an attack on the status of London as a financial centre where 70% of funds are based.

But tough new rules and more transparency in the sector is being championed by France and Germany and UK officials admit hard negotiations lies ahead.

Last week US Treasury Secretary Tim Geithner wrote to EU officials warning the directive was protectionist and would damage US funds. His letter angered Michel Barnier, EU commissioner for financial services, who said he was not amenable to pressure and would not take instructions ‘from Paris or London and certainly not from Washington’.