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The European sovereign crisis has had a major impact on global financial markets in the last twelve months and this report is a look at the relative performance of hedge funds investing in the region and investor sentiment for those funds.

• In the midst of this current crisis, funds investing in developed Europe have performed relatively well in 2011, -4.67% vs. -13.92% of the Stoxx Europe 600, however they have lagged the aggregate hedge fund industry.

• 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% in 2011. Early indications for September show developed Europe funds were -1.38% for the month vs. -4.78% for the Stoxx Europe 600.

• Investor interest in developed and broad Europe focused funds has been below average in 2011. 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. This follows an estimated outflow of $13.3 billion in 2010, which began in earnest in May/June 2010, the months following the first major spike in troubled European sovereign yields.

• On a regional basis, developed Europe focused funds have had the highest rate of combined liquidations and non-responsive fund de-listings in the HFN database, however average fund size remain larger than those focused in North America and Asia/Pac ($212mm vs. $206mm and $130mm, respectively).

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. 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.

(press release)

Full report: plaurelli@hedgefund.net

BG