eVestment | HFN Regional Focus Report: Developed Europe

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Overview: Developed Europe Focused Hedge Funds

The eA|HFN active and inactive databases have performance and asset information for 204 unique funds that invest primarily in developed European markets. There are an additional 317 funds which invest broadly across all European markets. The latter may have large exposure to developed markets, but are kept separate to ensure the prior group is a pure representation of developed Europe focused strategies.

•In the midst of the sovereign crisis in the Eurozone, funds investing in developed Europe have performed relatively well in 2011, -4.67% vs. -13.92% of the Stoxx Europe 600, however most lag the aggregate hedge fund industry.
•Investor interest in developed and broad Europe focused funds has been below average. Funds have had an estimated net outflow of $1.8 billion in 2011, or 1.0% of total AUM vs. 2.8% growth for the hedge fund industry.
•On a regional basis, developed Europe focused funds have had the highest rate of combined liquidations and non-responsive fund delistings in the HFN database.

The European sovereign debt crisis has been a slow developing fiscal mess which has severely hurt investor confidence. Hedge funds investing in these markets appear to have been defensively positioned, but there are still pockets of large losses. The remainder of this report will look at the sub-groups of funds investing in the region to see if outperformance of regional equity markets appears to be tactical or if it is more a factor of breadth of strategies and smoothed aggregate performance.

Developments in European Markets and Impacts on HFs
The European sovereign debt crisis has had global market implications, but the effects on European equity markets and hedge funds that focus on them has been direct in terms of relative performance, investor redemptions and liquidations. Following are highlights from the eVestment | HFN database on those funds focused primarily on developed European markets.

•Last twelve month percentile rankings of equity focused developed and broad Europe funds has lagged other developed equity market exposures at all data points.
•Figure 5 illustrates to what extent developed Europe fund performance has tracked the severity of the sovereign debt crisis as characterized by the spread between Greek and German two year sovereign yields. September appears to be another difficult month as the spread nearly doubled and the Stoxx Europe 600 was down almost 10% before the month end rally.
•The eA | HFN database has recorded a 12.4% decline in developed Europe focused funds due to liquidations and non-responsive fund delistings in 2011, nearly double that of broad Asia focused funds and 1.8x higher than North America funds.
•30% of developed Europe funds reporting through August are positive YTD. If September results are similar to August, less than 20% of funds will likely remain in positive territory. Of those reporting through August, 42% are down more than 5%.
•There is virtually no difference in average YTD performance for UCITS structured developed Europe focused funds and those not structured as UCITS.
•Despite above average investor outflows and performance losses, developed Europe focused funds remain larger on average than N. America funds ($212mm vs. $206mm), both of which dwarf the average size of Asia focused funds ($130mm).

There are pockets of positive returns amongst developed Europe focused funds, however no single sub-sector appears to be keeping its head above water. The implication being that positive returns are driven more so by the quality of management than environment. There is a proportional mix of credit, equity and commodity (power markets) funds among those up for the year.

Total Asset Levels
eA | HFN tracks AUM for funds investing across all European markets, including emerging Europe, but has not previously estimated flows for those investing solely in developed Europe. By backing out estimates for emerging Europe we can estimate flows for funds investing solely in developed Europe and broadly across all European markets, the latter being predominantly focused on developed Europe:

•AUM in funds investing across all European markets was estimated at $220.7 billion at the end of August 2011, down from a pre-2008 crisis peak of over $400 billion.
•At the end of August, HFN estimated emerging market Europe fund AUM of $44.8 billion and therefore an estimated $175.9 billion in AUM in funds investing primarily in developed broad European markets.
•Approximately ? of the combined AUM, or $44 billion is invested solely in developed European markets.
•Investors have withdrawn an estimated net $1.8 billion from Europe non-EM focused funds in 2011. This follows net redemptions of $13.3 billion in 2010.
•Redemptions in 2010 began in earnest in May ($10.7 billion net redeemed in May/June 2010) coinciding with the first major spike in European sovereign yields.

The investor flow data paints a very clear picture that investors have been actively reducing exposure to European markets, on an aggregate basis, since the first major fears of a sovereign default in the Eurozone. The rates of redemptions have slowed, but persisted in recent months.

Performance Comparisons by Region/Country
Developed Europe focused funds generally invest across many Eurozone markets; however there are a number of funds which invest either primarily in the U.K., or in Nordic markets. U.K. funds operate almost entirely in equity markets whereas Nordic funds have concentrations of funds trading regional power markets, mortgage bond and the equity markets.

Figures 8 and 9 and the table above show the performance of these funds and their sub-market classifications and performance of other developed country specific hedge fund exposures and equity benchmarks.

•Despite being primarily equity market oriented, U.K. focused hedge funds have performed very well compared to the FTSE 100 Index, however both are in negative territory mostly due to August returns. In September, the FTSE lost an additional -4.93%.
•Nordic equity focused managers have performed very well compared to regional EQ benchmarks. The credit related strategies have fared worse. Performance from these funds has been weighed down by those with leveraged exposure to Danish mortgage bonds.
•Canada focused funds are the only country specific group which has been unable to outperform the relevant equity benchmark in 2011.

Performance by Primary Strategy in Developed Europe
Funds investing in European markets typically fall into one of five primary strategies; Long/Short EQ, Market Neutral EQ, Event Driven, Credit and Multi-Strategy. Figures 9 and 10 and the table on the following page illustrate the relative performance of funds utilizing these strategies in developed European markets to their counterparts operating primarily in other developed market.

•There is a high concentration of funds investing the Danish mortgage market in the developed-only credit group. These funds appear to have suffered after the Basel III proposal determined the bonds would have a limited role in bank holdings as liquidity instruments.
•The classification of broad European credit funds, which have performed more in-line with other developed market credit funds, is more indicative of developed European credit expsure, however their descriptions of regional orientation tend to be more open ended.
•European market neutral equity and event driven strategies have lagged their developed market counterparts by a wide margin in 2011.
•Long/short equity funds have been in-line with North America focused strategies. Asia/Pac long/short funds have performed noticeably better in 2011.

The last page of the report contains full correlations of monthly returns between regional primary strategies and both equity and hedge fund benchmarks over various time frames.

Going Forward
Among the high concentration of equity focused managers in developed European markets, there appears to be a pronounced defensive positioning which has led to the large outperformance during recent market declines. Early indications for September show an average return of -1.38%, compared to a decline of -4.78% in the Stoxx Europe 600, however this may drift lower as more funds report. Combined developed and broad Europe funds are -0.54%.

In the longer term, it is difficult to ignore the consideration that amid this crisis there may be massive value and opportunity being created, similar in concept to the environment mortgage related strategies realized post-2008 financial crisis. The declining rates of net outflows in recent months may be an indication that allocations may be beginning to return in anticipation. Where and when opportunities will be available are obviously the key, but chances are there will be hedge funds at the forefront.

HFN will publish Europe focused fund flows estimates in the both the early performance release due out Tuesday October 11th and in the Monthly Industry Report the week of the 24th.

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HFN regional focus report: the Middle East and Africa

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Overview: hedge funds invest in MEA

HFN active and inactive databases have performance and asset information for 85 unique funds investing primarily in the region of the Middle East and Africa (MEA). Of these, 59 unique products of the active database. For this report, are resources grouped into one of three classifications for their regional investment focus, the Middle East/North Africa, Pan-Africa and South Africa only.

• South Africa focused funds performed well in 2011 after backlogged 2010 while MENA funds have lagged the rest of the hedge fund industry over the past three years.
• Pan-Africa funds directly the hedge fund industry since becoming a recognizably classification in 2006, but since the beginning of the uprising in Tunisia and Egypt, average performance is almost 6%.
• HFN estimates the total assets in funds that invest primarily in all three regions was 8.78 billion dollars at the end of May 2011 with AUM in MENA strategies narrowly higher than South Africa.

Months after the initiation of the revolutions in Tunisia and Egypt, MENA average fell almost 6% and Pan-African agents decreased more than 6% while South Africa focused funds increased 7%. Themes such as investment in regions vary, obviously, but each face serious headwinds shortly.

The following pages break down the qualitative composition, investors flow trends and performance of MEA focused resources to shed light on the source of their different yields and current investor sentiment against these products.

HFN database composition and its properties
The qualitative features of the Middle East and Africa focused resources in HFN database gives an indication of the dominant characteristics of these products:

• South Africa focused Fund launches was greatest in 2003 and continued in the above average by 2006, but has declined while the liquidations of cow's milk added in 2010.
• Mena Fund launches peaked in 2006 and 2007, followed by the above, average liquidation in 2009. New launches have not been near the pre-2008 prices.
• Pan-Africa funds is a relatively new group, with the launches were originally ursprungshalten 2007 and again reaches a high 2010.
• Compared to MENA focused resources, South Africa and the Pan-African agents had minimal shutdowns after the financial crisis.
• The majority of MENA funds operated by the arab States and South Africa running out in South Africa funds, but the majority of the Pan-Africa funds operated out of London.

Total assets levels
HFN has not historically tracked assets and routes for Pan-Africa and South Africa focused means of MENA. In addition, estimates the AUM below for funds which invest mainly in the regions and the total hedge fund AUM invested in the region. Total AUM hedge fund invested in the region is probably much higher because of the multi-regional emerging market funds, including investing:

• Mena focused funds AUM peaked in Q2 2008 nearly 10 billion dollars. The Summit was concurrent with high total hedge fund industry AUM, while supply decline after the financial crisis was more dramatic and recovery slower. MENA Fund AUM reached a low of less than 4 billion dollars in Q1 2009, and is now only slightly larger.
• Investor reactions to civilian uprising in the MENA region was net redemption 2011. Redemption from MENA focused strategies speeded up in March and April 2011 peaked.
• South Africa focused funds had approximately 3.27 billion dollars in AUM at end of May. Investor redemption passed appropriation during the first three quarters of 2010, but the trend seems to have reversed in 2011, but the growth has been slow.
• Pan-Africa focus Fund AUM reached estimated 977 million dollars at the end of May 2011. Despite good performance relative to industry in 2010, there were net redemption during the year. Core growth in 2011 is 2.8 per cent, which is slightly lower than average in the industry.

Correlation of returns
Figure 6 shows the relationship between monthly for MEA focused funds to other regional and country specific emerging market HFN indices and relevant equity benchmarks for three specified time frames. Information is useful to compare historical relationships and how they have changed.

• South Africa focused funds have historically had a low correlation to the country's stock markets. The ratio has been reversed in the last 12 months.
• Mena focused funds historically had low but positive correlations to other emerging markets and regional equity benchmarks, but these correlations increased and be high after the financial crisis.
• Pan-African Fund correlations have been added during the financial crisis, but has fallen back in recent months, but they still remain above historical levels.
• Mena fund performance resembles most closely that traditional emerging markets, while the Pan-Africa and South Africa funds tend to be less correlated. This illustrates the different growth stories in Africa and the larger emerging markets which are more closely related to the buy-out market influences.

Compared to other emerging markets
The table below, Figure 7 and 8 and the table at the bottom of the report, compare the returns from Mea funds to emerging market hedge fund HFN indices and regional equity indices.

• Since 2001, South Africa focused funds crisis management MSCI South Africa Index during the down months only once, the best against the record in the three groups.
• The average outperformance in the index, with South Africa funds down months since 2001 is more than 700 points. The average underperforming during positive index is slightly worse months than 450 bps.
• In the past two years, South Africa funds have seen their average outperformance in equity benchmark down months decreased and have also seen underperforming during index up months from worsening.
When comparing historical returns the last two years, only MENA resources has continued to produce returns with greater average outperformance in equity index benchmark down months than average underperforming under benchmark up-months.

Middle East and Africa UCITS products and funds of funds
HFN can create benchmarks for further subclassification of MEA products that meet the standards set out in the directive on UCITS funds of funds investing in the region.

Forward
Investors ' interest in funds focused on the markets of the Middle East and Africa have been below average for the year 2011, which is a clear indication investors aren't comfortable with the current social and political climates in the region. Outside of South Africa, has so far shown decision performance wise. In hedge fund space there is a history of the returns covered by investors who recognizes emerging opportunities sooner than the rest. The last known example is in based security after the financial crisis.

There are a number of reports from the Oakland Institute require attention for private investments, including hedge funds and other institutional investors, in soil in Africa with an eye on the development of agriculture. Reports that raises the questions of the extent to which government interests adapt to the local population and to long-term best use of land, but the existence of the research is evidence of potentially profitable opportunities in these markets. Still, there will always be political uncertainty and given the effectiveness of the insurgency in northern countries, there is still a high risk to invest in the region. In addition, it is important to remember that past performance has proven that the MENA and Pan-Africa focused funds showed high correlation to developed markets in times of global stress.

Click here to read the full report.

HFN regional focus report: the Middle East and Africa

Click here to read the full report.

Overview: hedge funds invest in MEA

HFN active and inactive databases have performance and asset information for 85 unique funds investing primarily in the region of the Middle East and Africa (MEA). Of these, 59 unique products of the active database. For this report, are resources grouped into one of three classifications for their regional investment focus, the Middle East/North Africa, Pan-Africa and South Africa only.

• South Africa focused funds performed well in 2011 after backlogged 2010 while MENA funds have lagged the rest of the hedge fund industry over the past three years.
• Pan-Africa funds directly the hedge fund industry since becoming a recognizably classification in 2006, but since the beginning of the uprising in Tunisia and Egypt, average performance is almost 6%.
• HFN estimates the total assets in funds that invest primarily in all three regions was 8.78 billion dollars at the end of May 2011 with AUM in MENA strategies narrowly higher than South Africa.

Months after the initiation of the revolutions in Tunisia and Egypt, MENA average fell almost 6% and Pan-African agents decreased more than 6% while South Africa focused funds increased 7%. Themes such as investment in regions vary, obviously, but each face serious headwinds shortly.

The following pages break down the qualitative composition, investors flow trends and performance of MEA focused resources to shed light on the source of their different yields and current investor sentiment against these products.

HFN database composition and its properties
The qualitative features of the Middle East and Africa focused resources in HFN database gives an indication of the dominant characteristics of these products:

• South Africa focused Fund launches was greatest in 2003 and continued in the above average by 2006, but has declined while the liquidations of cow's milk added in 2010.
• Mena Fund launches peaked in 2006 and 2007, followed by the above, average liquidation in 2009. New launches have not been near the pre-2008 prices.
• Pan-Africa funds is a relatively new group, with the launches were originally ursprungshalten 2007 and again reaches a high 2010.
• Compared to MENA focused resources, South Africa and the Pan-African agents had minimal shutdowns after the financial crisis.
• The majority of MENA funds operated by the arab States and South Africa running out in South Africa funds, but the majority of the Pan-Africa funds operated out of London.

Total assets levels
HFN has not historically tracked assets and routes for Pan-Africa and South Africa focused means of MENA. In addition, estimates the AUM below for funds which invest mainly in the regions and the total hedge fund AUM invested in the region. Total AUM hedge fund invested in the region is probably much higher because of the multi-regional emerging market funds, including investing:

• Mena focused funds AUM peaked in Q2 2008 nearly 10 billion dollars. The Summit was concurrent with high total hedge fund industry AUM, while supply decline after the financial crisis was more dramatic and recovery slower. MENA Fund AUM reached a low of less than 4 billion dollars in Q1 2009, and is now only slightly larger.
• Investor reactions to civilian uprising in the MENA region was net redemption 2011. Redemption from MENA focused strategies speeded up in March and April 2011 peaked.
• South Africa focused funds had approximately 3.27 billion dollars in AUM at end of May. Investor redemption passed appropriation during the first three quarters of 2010, but the trend seems to have reversed in 2011, but the growth has been slow.
• Pan-Africa focus Fund AUM reached estimated 977 million dollars at the end of May 2011. Despite good performance relative to industry in 2010, there were net redemption during the year. Core growth in 2011 is 2.8 per cent, which is slightly lower than average in the industry.

Correlation of returns
Figure 6 shows the relationship between monthly for MEA focused funds to other regional and country specific emerging market HFN indices and relevant equity benchmarks for three specified time frames. Information is useful to compare historical relationships and how they have changed.

• South Africa focused funds have historically had a low correlation to the country's stock markets. The ratio has been reversed in the last 12 months.
• Mena focused funds historically had low but positive correlations to other emerging markets and regional equity benchmarks, but these correlations increased and be high after the financial crisis.
• Pan-African Fund correlations have been added during the financial crisis, but has fallen back in recent months, but they still remain above historical levels.
• Mena fund performance resembles most closely that traditional emerging markets, while the Pan-Africa and South Africa funds tend to be less correlated. This illustrates the different growth stories in Africa and the larger emerging markets which are more closely related to the buy-out market influences.

Compared to other emerging markets
The table below, Figure 7 and 8 and the table at the bottom of the report, compare the returns from Mea funds to emerging market hedge fund HFN indices and regional equity indices.

• Since 2001, South Africa focused funds crisis management MSCI South Africa Index during the down months only once, the best against the record in the three groups.
• The average outperformance in the index, with South Africa funds down months since 2001 is more than 700 points. The average underperforming during positive index is slightly worse months than 450 bps.
• In the past two years, South Africa funds have seen their average outperformance in equity benchmark down months decreased and have also seen underperforming during index up months from worsening.
When comparing historical returns the last two years, only MENA resources has continued to produce returns with greater average outperformance in equity index benchmark down months than average underperforming under benchmark up-months.

Middle East and Africa UCITS products and funds of funds
HFN can create benchmarks for further subclassification of MEA products that meet the standards set out in the directive on UCITS funds of funds investing in the region.

Forward
Investors ' interest in funds focused on the markets of the Middle East and Africa have been below average for the year 2011, which is a clear indication investors aren't comfortable with the current social and political climates in the region. Outside of South Africa, has so far shown decision performance wise. In hedge fund space there is a history of the returns covered by investors who recognizes emerging opportunities sooner than the rest. The last known example is in based security after the financial crisis.

There are a number of reports from the Oakland Institute require attention for private investments, including hedge funds and other institutional investors, in soil in Africa with an eye on the development of agriculture. Reports that raises the questions of the extent to which government interests adapt to the local population and to long-term best use of land, but the existence of the research is evidence of potentially profitable opportunities in these markets. Still, there will always be political uncertainty and given the effectiveness of the insurgency in northern countries, there is still a high risk to invest in the region. In addition, it is important to remember that past performance has proven that the MENA and Pan-Africa focused funds showed high correlation to developed markets in times of global stress.

Click here to read the full report.