As the success of hedge funds grows across Europe, the Italian market grows and grows, according to

World Finance’s William Henry

Made in Italy:hedge funds

Inward Investment: ItalySeptember-October 2008 www.worldfinance.com 163

years of all the Italian funds of hedge funds, with the same products being top performers in the five year ranking of Italian multi-strategy funds of hedge funds (Hedge Invest Global Fund) and in that of specialist products (Hedge Invest Sector Specialist), according to MondoHedge at the end of April 2008.

Performances of the Italian fund of hedge funds As for product performance, coming back to the Italian market trend, the presence of a number of products with a track record of at least six years now allows for a sufficiently reliable analysis. The available data, updated to late April 2008, says that as from January 2002 (date of start of MondoHedge Index, a representative benchmark of the alternative sector) Italian funds of hedge funds (94.3 percent of the supply) managed to protect the capital in the most difficult periods for the market, while profiting from opportunities whenever they came up.

In the period examined, the sector has in fact averaged returns of +28.9 percent, net of frees and taxes, against 23.8 percent of the Msci World in local currency and 28.09 percent of the JP Morgan Gbi in local currency (for the benchmarks given before fees and taxes). The highest results (+32.5 percent) were achieved by high volatility funds of hedge funds, which have larger stakes invested into more directional alternative strategies (Macro, Cta, long/short equity and emerging market).

A +30.4 percent growth of net profits was recorded by funds of hedge funds equity (which specialise in the selection of the best long/short equity managers); for their part, funds of hedge funds low and medium volatility also fulfilled investors’ expectations generating +28.5 percent of profits with low volatility.

As for volatility, funds of hedge funds of low and medium volatility in fact recorded in the period a 2.90 percent annual standard deviation against 4.07 percent of funds of funds equity and 4.2 percent of high volatility

funds of funds. In the same period, the stock market volatility amounted to 12.3 percent (Msci World in local currency), whereas volatility of government bonds was 2.97 percent (JP Morgan Gbi in local currency).

The protection characteristics of hedge funds were particularly evident on the occasion of bear markets: in the April 2007 to March 2008 period, with stock markets showing a 20.2 percent fall in euro and 11.4 percent in local currency (Msci World), on the average Italian funds of hedge funds managed to contain negative results to 0.22 percent (MH Fdf General Index). When considering the December 2001-March 2003 period, the stock market showed a 39.1 percent fall in euro and a 29.8 percent decrease in local currency, while Italian funds of hedge funds averagely grew by 2.4 percent.

This result was achieved thanks to the dynamic nature of Italian funds of hedge funds, which is summarised by the coefficient of correlation and the beta index between fund of hedge fund sector and the stock market, which was variable with time (averagely amounting to 0.53 and 0.14, respectively): it rose in a scenario of market visibility and fell during periods of uncertainty. n

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Among Italian hedge fund managers it is worth mentioning Hedge Invest, which is always at the top of the rankings

Italy was one of the first countries in Europe to establish specific regulations in the area of hedge funds, and seven years after their introduction (the first hedge fund

was launched in 2001), the model adopted has proved to be successful. Assets under management of the hedge fund sector in Italy have in fact reached @24bn, with growth rates of 30 percent, even in the last 24 months, when long-only products show an opposite trend. The reasons for the success of Italian hedge funds lie both in the specific Italian regulations and in the excellent results attained in terms of products performance.

Italian laws for hedge funds in fact allow managers to operate with the required flexibility, as they do not provide for specific obligations to be fulfilled in the asset allocation process. At the same time the Italian law establishes the presence of a depositary bank, able to guarantee asset separation between investment management company and hedge fund, and surveillance by Bankitalia both in the preliminary phase (to the launch of alternative companies and of single hedge funds) and afterward.

These structural characteristics helped reduce the operating risks, typical of hedge funds, other than granting a proper balance between the transparency and protection due to the investors, and the operating freedom required by hedge fund managers.

Also, the minimum €500,000 investment threshold means that hedge funds can only be sold to investors who are able to deal with their peculiarities, therefore excluding the retail segment, which would have led to the need for stricter regulations in order to protect the retail investors.

A further positive element was the dynamic response of the managers to the opportunities offered by Italian law, which has gradually brought to the present 41 authorised alternative asset management companies, 66.6 percent of which linked to banks/insurances and 33.4 percent independent.

Hedge Invest: private investors, leading asset managersAmong the independent Italian hedge funds managers it is worth mentioning the case of Hedge Invest, which was one of the first five alternative asset management companies authorised by Bankitalia and which steadily positions itself at the top of the Italian rankings, for both assets under management and product performance.

Hedge Invest was established in 2001 by the Antonello Manuli’s family, high net worth individuals who had created and managed directly a fund of hedge funds in order to achieve protection and growth of their own capitals. As such, the opening of Hedge Invest represented the first entrepreneurial initiative of private investors, to make available to third parties the considerable know-how they gained over years in hedge fund investing. Thus differentiating itself from other independent money managers who entered the hedge sector after experiences in the long-only approach, Hedge Invest presented itself to the Italian market betting on the appeal of some key pillars: Independence (the shareholders base does not include any financial institution). Specialisation (the company is entirely dedicated to the management of funds of hedge funds). Shareholders’ commitment (investing own assets in the funds and holding positions in the management of the company). Focus on research (investment process based on in-depth analysis, supported by a research team based in London). A wide range of products (eight funds of hedge funds, diversified by strategies and risk-return profiles). Innovation (the company shows the largest share in Italy of specialist products within its range and the only fund of hedge funds in Italy that distributes returns on an annual basis).

Not surprisingly, at the end of the April 2008, while still in the middle of the August 2007 crisis, two Hedge Invest products were in the first two positions of the ranking over five