European Hedge Funds Consider Diversification Strategy

After suffering record redemptions in the wake of the financial crisis, European hedge fund managers have shown a greater interest in diversifying their investor base.


In October 2007, when Eric Personne arrived at the London office of Merrill Lynch & Co. as head of its fund solutions group, he insisted that the team expedite an ambitious project to tailor third-party hedge fund strategies to a European onshore retail fund format. Personne was so sure that the convergence between alternative and traditional asset management was poised to accelerate, he set to work trying to convince some of the City’s top hedge fund talents to consider distributing their funds more broadly and diversifying their investor base.

“Nobody cared,” says Personne, who spent ten years at Société Générale, most recently as European head of hedge fund exotic trading, before joining what is now Bank of America–Merrill Lynch. “It was raining money in the hedge fund industry at the time.”

Not anymore. After suffering record redemptions in the wake of the crisis, hedge fund managers in the U.K. and Europe have begun to care deeply about diversifying their investor base. Cross-border retail fund distribution in Europe, which is governed by a European Union directive called Undertakings for Collective Investment in Transferable Securities (Ucits), is suddenly a hot topic. And thanks to a 2002 revision, Ucits III, European money managers are now permitted to replicate offshore hedge fund strategies by deploying a much broader range of financial derivative instruments for investment purposes, including taking short positions and leveraging a fund up to 100 percent of its net asset value.

Over the past 18 months, six major hedge fund firms, including BlueCrest Capital Management, Brevan Howard Asset Management, GLG Partners, Man Group’s AHL, Marshall Wace and York Capital Management, have either launched inaugural Ucits-wrapped hedge fund strategies or added to their existing Ucits fund platforms. Even specialist firms like Lyxor Asset Management and big diversified money managers like Skandia Investment Group have recently established Ucits-compliant hedge fund products.

At BofA–Merrill, Personne is feeling vindicated: Some of the highest-profile Ucits hedge funds are now available on the bank’s platform — and the firm is looking to add more.

For European retail investors the transparency, liquidity and regulatory oversight of Ucits-compliant funds is certainly a draw. But ironically, the funds may ultimately begin to attract institutional investors too. Says Anthony Marber, head of marketing and investor relations at Marshall Wace: “Many institutions that were not able to embrace alternative strategies, for regulatory reasons, can now invest in hedge funds for the first time.”