German Hedge-Fund Market Could Top 20 Bn Euros, Says Mercer

by Phillip Morton, Investors Offshore.com

10 August 2004

Although hedge-fund sales in Germany have been disappointing since the market was liberalised earlier this year, investment consultancy Mercer says in a new report that the market could grow to as much as 20 billion euros in the next five years. Herwig Kinzler, head of Mercer's German practice, says that institutional clients still tend to see hedge funds as risky, and are unaware of the different risk profiles offered by the asset class. Less than five percent of institutional investors have so far allocated resources to the asset class, and the allocation has been under two per cent of the portfolio, says the report.

Kinzler says however that the market should spring into life when financial regulator BaFin issues rules on how pension funds and insurance companies can invest in hedge funds by the autumn. BaFin's draft rules, circulated last week to insurance firms for consultation, will permit insurance firms to invest through funds of funds or single funds but will prohibit them from direct ownership of hedge fund products, and will limit hedge-fund investment to 5% of a portfolio.

“This is a major step in granting the opportunity in diversifying German institutional investors portfolio, even if the initial investment limits are restrictive,” says Kinzler. “We believe that this development might add importance to the debate and accelerate allocation to hedge funds.”

The report expresses a concern that BaFin's very detailed rules and transparency requirements for tax and regulatory purposes may prompt off-shore hedge funds and funds of funds to continue to use structured notes to deliver their products in the German market, adding to the costs of investments in hedge funds.

Klaus Bollmann, chief financial officer at Union Alternative Assets, said last week that in the long term, more than 5% of assets could be allocated to these investments.

Prior to the introduction of single hedge fund rules by BaFin in February, hedge funds in Germany were tightly restricted. Among firms to have taken advantage of the new rules are Warburg Invest and Swiss banking group SYZ, who have launched a joint agreement to develop, manage and distribute the alternative products in Germany. Warburg Invest, the German asset management company of Hamburg-based private bank M M Warburg, SYZ plan to launch German-based funds-of-funds targeted at both high-net-worth and institutional investors and will also offer alternative management services to institutions.

Geneva-based SYZ, with offices in London, Luxembourg, Nassau, Salzburg and Milan, manages $6.6 billion in assets. The funds-of-funds will be advised by SYZ alternative research and management subsidiary 3A, which has over $1.2 billion in funds-of-funds assets. 3A manages Altin AG, a fund-of-funds founded in 1996.

The German government's decision to relax hedge fund rules is part of a broader law driven by the European Union known as the Investment Modernization Act. The act harmonizes foreign and domestic tax treatment for investment funds, improves transparency for investors and eases some of the rules on companies that offer investment funds in Germany.

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