German investors might at last be warming to hedge funds. Citigroup, for one, believes so and is about to test the waters. It has just launched the first long/short hedge fund off its platform in Germany. Teaming up with German securities trading house Baader Wertpapierhandelsbank as portfolio manager, the fund will be sold to institutional investors in Germany and Austria though private placements via Bank Medici.
It's an interesting move. As Justin Dew, senior hedge fund specialist at Standard & Poor's, points out: "It is pretty brave of Citigroup to go ahead with this launch, given the perceived negativity towards investing in hedge funds in Germany."
One of the explanations most analysts give for this poor uptake has been the negative political atmosphere. However, Steffen Gnutzmann, tax lawyer in the asset management practice of PricewaterhouseCoopers in Frankfurt, says: "The political problems that have been associated with hedge funds is hype." Rather, he blames the slow development of hedge funds in Germany on their late arrival. Legislation for onshore hedge funds was not put in place in Germany until January 2004. Furthermore, the new legislation required fund managers to reveal their trading positions twice a year.
Such revelations inevitably hurt investor returns, making hedge funds less lucrative in Germany than in other European centres. The difficult environment has also meant that much talent left Germany to run hedge funds abroad. According to research and consultancy group Celent, German hedge funds constitute just 1% of the European total. Considering Germany's powerful economic position in Europe, this figure should be much higher.
But Gnutzmann says demand is there although investor education will be crucial. "Many investors do not have a sufficient understanding of what hedge funds are doing and of how they can be used in a reasonable way for the investor's portfolio allocation. Furthermore many German investors – especially regulated investors, such as insurance companies and investment funds – have yet to acquire the knowledge/prerequisites that supervisory law requires them to have before investing into hedge funds." Gnutzmann says hedge fund promoters and investors should take responsibility for the lack of awareness of hedge funds as an investment opportunity.
Uto Baader, CEO of Baader Wertpapierhandelsbank, agrees that demand is increasing, particularly from pension funds and insurance companies. He predicts that the fund will attract €250 million to €300 million within the first two years. That's optimistic, say some analysts, given that the entire German hedge fund market is expected to reach just €2 billion at the most by the end of 2005, from €1 billion at the end of 2004.