` Institutional appetite for alternative investments is likely to grow, according to asset allocators...
Institutional appetite for alternative investments is likely to grow, according to asset allocators at the MAR Hedge Conference in Geneva.
Thomas Weber, head of hedge fund investments at LGT Capital Management AG in Liechtenstein, said: "Market conditions increasingly favour alternative investment opportunities.
"The single European currency and market has already eliminated convergence trades, but a number of opportunities have been created by economic restructuring, harmonised regulations, booming equity markets and the need for diversification away from the US market.
"Above all, converging and falling sovereign bond yields have necessitated a search for returns."
Major beneficiaries of additional European investment opportunities are likely to be long/short equity strategies, convertible arbitrage, high yield strategies and merger arbitrage, Weber said.
While the European high yield market has been overestimated recently, it is finally expected to grow significantly.
"European currency-denominated high yield bond issue from 1 January to 1 September 1999 was $5.5bn versus $5.3bn in 1998. Total outstanding issues in Europe amount to roughly e30bn versus $650bn in the US.
"According to Moody's, two-thirds of European corporate issuers are rated Aa or better versus 13% in the US, with 37% of US issuers rated below investment grade against less than 10% in Europe.
"Far fewer companies are rated in Europe than in the US and the average rating of European issuers has fallen."
A number of trends are now in favour of the growth of this market, according to Weber.
"Banks are more hesitant to continue lending and companies are much less geared than US firms. Harmonisation and the creation of a European SEC or FSA could further promote high yield issuance or trading.
"Further corporate restructuring, such as M&A activity, LBOs, MBOs and so forth, should also foster high yield growth. Mike Milken was recently quoted as saying that Europe could in theory catch up with the US in three to five years."
European merger arbitrage also looks set to grow, said Weber.
"European deal flow surpassed US deals for the first time in the third quarter of 1999. The key drivers for European merger arbitrage are continuing - the single currency, more consistent EU-wide regulation that will encourage cross-border transactions, high levels of cash in companies' coffers and reduced political interference."
From a demand point of view, hedge fund growth has been strong and is expected to continue, with assets growing from well under $50bn in 1990 to around $325bn in 1998.
"Institutional buyers are likely to dominate the markets for hedge funds and private equity, with managed futures continuing to be dominated by the retail investor."
There is recent concrete evidence of the growth of institutional appetite for hedge funds.
"In the UK we have seen the trustees of the £23bn British Coal Staff Superannuation Scheme and Mineworkers' Pension scheme increase its hedge fund and venture capital allocation from 3% to 5%. Actuaries and pension fund consultants are also showing interest."
"In Germany, insurance companies are increasingly interested, but there are still tax and regulatory problems. In Switzerland, there is interest from insurance companies as well as from corporations and pension funds. In the Netherlands, the civil service pension fund ABP has announced a $5bn allocation to alternative strategies."
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