If London didn’t exist, hedge fund managers would have to invent it – for its light-touch regulation, its hub of expertise, and its hunger for innovation.
The hedge fund industry is worth $1.5 trillion (£0.75 trillion) globally, according to financial services specialists IFSL, and London is its European capital with $360 billion (£180 billion) of assets under management.
That the UK hedge fund industry should account for around 80 per cent of hedge fund assets managed in Europe is unsurprising, given the critical mass of expertise and experience of innovative financial products amassed in London.
Fast facts
The UK hedge-fund industry accounts for around 80 per cent of hedge-fund assets managed in Europe
London has more than doubled its share of the world’s hedge funds in the last four years
A recent study by French business school EDHEC placed UK managers at the top of the European ‘alpha league’ – that is, judged by the extent to which they outperform the market.
Investor appeal
London has more than doubled its share of the world’s hedge funds in the last four years – from 10% to 21% – in contrast to New York, the traditional home of hedge funds, which saw its share shrink from 45% to 30% over the same period.
Broadly, the growth of London-based hedge funds has been fuelled by an appetite among global investors for vehicles that avoid the potential volatility associated with equities.
“They [hedge funds] offer investors diversified returns from a range of sources, and they're uncorrelated to equities and bonds,” says Julian Young, a partner at Ernst & Young, which plans to double the size of its London-based hedge-fund team.
Hedge funds will continue to grow both in size and complexity.
Julian Young
Partner
Ernst & Young
“They can also use more techniques to mitigate risks related to equities,” he adds.
Local and global operations
Many of the sector’s players are home-grown – the London-listed Man Group, for instance, with US$60 million (£30.2 million) in assets under management.
But the world’s largest owners of hedge funds – investment bank JPMorgan, with US$34 billion (£17.1 billion) in assets under management, and Goldman Sachs, with US$32.5 billion (£16.4 billion) – also have significant fund-management operations in the UK capital.
Surrounding and supporting them is a sophisticated financial services industry infrastructure: the UK has the talent both in fund management and in clustered subsidiary services such as accountancy, law and prime brokerage.
Maturing – but still innovative
The growth trend is likely to continue, not least because of the Financial Services Authority’s recent proposal to set up a unified listing regime for funds.
Access to a centre of global finance
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This will provide better investor protection while still promoting the continuing development and innovation that has made the industry such a success.
The mooted expansion of hedge funds to retail investors in the UK will likely broaden interest in the asset class – and increase hedge funds’ interest in London listings because of the quality stamp that a listing in London provides.
Hedge funds are an increasingly legitimised category, as (largely cautious and long-term investing) European institutional investors look towards them with growing interest as an alternative asset class.
On top of a trend
Yet this is still finance’s new frontier – and London is the global centre for financial innovation.
“Hedge funds will continue to grow both in size and complexity,” says Julian Young.
Recognising this, boardroom-level bankers have left their banks in the last few years to take up opportunities running hedge funds in London.
Earlier this year, for example, Clayton Heijman left Fortis Bank, where he managed global alternative investors, to exploit possibilities for growth in hedge funds in the UK capital.
Others are likely to follow as hedge funds continue to grow and London exploits its position at the forefront of a global trend.
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