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Analysis: Alternatives at all-time high in Europe

By Paul Mackintosh  
Jul 17, 2019

Alternative assets under management in Europe was at a record high 1.62 trillion euros (US$1.82 trillion) as of end-June 2018, according to a recent report from data provider Preqin. Although that’s still only one-third the North American figure, it’s the second largest regional alternatives pool in the world.

What’s more, the industry is in high gear, with some 300 billion euros of those assets coming on board in the last three years alone. Preqin Chief Executive Mark O’Hare says there are over 6,300 fund managers and 3,000 institutional investors active in Europe. It’s worth recalling that these investors are committing all that money despite a period of below-par growth in Europe and an uncertain macro outlook.

Additionally, that investor community seems to be on the cusp of a change in its preferences. The report says hedge funds are Europe’s top choice for alternatives, comprising 38% of the region’s total alternatives AUM. But the figures suggest this could soon be dislodged by private equity, especially given the surge in fundraising and dealmaking over the past couple of years.

Hedge funds comprised 608 billion euros of alternative assets, with private equity a close second at 559 billion euros. However, the latter figure comprises 25% growth in the preceding two-and-a-half years while hedge fund AUM only grew 6% over the same period.

What’s driving all this interest? Well, interest rates at historic lows, for one thing, along with Europe’s less-than-dynamic growth profile. Against such a background, alternatives are not having a hard time demonstrating their outperformance. You do have to wonder, then, what would happen in the event of a more marked shift in the macro environment, such as, for example, the European Union really getting its act together about serious banking sector reform, or – miracle of miracles – an end to the Brexit debacle.

I do think the historically favourable environment for alternatives masks some serious unanswered questions about their structure, such as why two such very different asset classes as hedge funds and private equity share such a similar compensation structure. You don’t have to be a Nobel prize winner in economics to observe that the entire European alternatives industry is still well below the $6.52 trillion AUM of BlackRock alone.

Significant as alternatives are, they remain just that: alternatives to the stock and bond universe. Numbers are going to have to change a lot more before they become anything more than exactly what their name declares.