However, its share has dropped from 82% in 2002 to 67% in 2007. Europe and Asia gained in importance during this period with Europe’s share nearly doubled to 22% of assets, and Asian managers’ share increased from 5% to 7% of the global total. While London’s share of global hedge fund assets more than doubled between 2002 and 2007 to 20%.
At the end of 2007, four-fifths of the stock of European hedge fund assets totalling around $500bn were managed out of the UK, the vast majority from London. The figures do not include fund of funds and investments from the US managed in Europe. If these are taken into account, London probably accounts for more than 90% of hedge funds assets managed in Europe.
The report said that growth of the UK and European hedge fund industry has primarily been driven by increased investment from institutional investors, attracted by risk diversification, flexibility of investment options and ability to deliver nonmarket correlated returns.
The study notes that hedge fund assets in 2007 were up 30% on the previous year despite the growing credit crisis and increased market volatility. However, the impact of the credit crisis began to feed through in the final quarter of the year with a slowdown in net-inflow of funds which continued into the first quarter of 2008.
Returns also declined in the latter half of 2007, leverage decreased and a number of large credit strategy related hedge funds were liquidated.
Despite these difficulties, 2007 overall was a strong year for the hedge fund industry. Hedge funds have not had a significant influence on the credit crisis as only around 5% of their assets were invested in mortgage-backed securities in September 2007.
There were more than 1,500 European-based hedge funds in 2007, of which two-thirds were located in London.
Other important locations for hedge fund managers in Europe include France, Spain and Switzerland.
The study argues that London’s strong position is due to many factors including its local expertise, the proximity of clients and markets, a strong asset management industry and a favourable regulatory environment.
London is also a leading centre for hedge fund services such as administration, prime brokerage, custody and auditing. The financial barriers to entry into prime brokerage are high and business is principally conducted by large investment banks.
“With around a half of European investment banking activity conducted through London, it is a natural location for prime brokerage services,” the report adds.
At the end of 2007 around a half of the number of hedge funds were registered offshore. The most popular offshore location was the Cayman Islands (57% of number of offshore funds), followed by British Virgin Islands (16%) and Bermuda (11%). The US was the most popular onshore location (with funds mostly registered in Delaware) accounting for nearly two-thirds of the number of onshore funds, with European countries accounting for most of the remainder.