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HVB Gets Rid of Its Lion Share

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MUNICH, Germany (–The Bermuda-based hedge fund Lion Global Opportunity (LGO) looks set to close following the withdrawal of around 125 million euros since November by its biggest investor, HypoVereinsbank. The fund’s head, Peter Neumayer, this week told Financial Times Germany that the last investors will probably have left the fund by the end of the month.

It hasn’t been a good month for Lion Advisors, the Munich-based firm which runs LGO (Bermuda). Its domestic hedge fund, Lion Global Opportunity Investment Aktiengeselleschaft, which registered with the German regulator BaFin in February 2005, failed to raise enough capital to start trading within the prescribed time limit and had its permission to operate automatically withdrawn.

HVB was initially investment adviser to LGO, which was set up in Bermuda in June 2000. In July 2003 the Lion team went independent in a management buyout backed by HVB. “The MBO contract with HVB was fulfilled by both sides,” said Mr. Neumayer. “We paid the purchase price, while they remained invested beyond the lockup period.” So what provoked the change of heart at HVB? “From what I have heard, it wasn’t the result of balance sheet rationalization, but rather a change in strategy within the corporate markets division,” said Mr. Neumayer. One source suggests this change in strategy has its roots in June 2005, when Italy’s Unicredit bought HVB for 19.2 billion euro.

“Unfortunately for us, the HVB redemption sparked an ‘exit spiral,’” continued Mr. Neumayer. “Because of our reduced level of assets, some investors found their internal rules were now being breached–for example, because they were now beyond the ownership threshold for individual funds established in their investment guidelines–forcing them to withdraw too.” Mr. Neumayer said performance was not an issue, since the fund had returned 14.2% in 2005, while remaining within desired volatility limits. “No one had any complaints about the returns,” he said.

Germany’s domestic hedge fund industry has failed spectacularly to live up to expectations since 2003, when the law was changed to allow domestic hedge funds to operate from January 2004. In late 2003 Axel Benkner, head of Deutsche Bank’s mutual fund arm DWS, predicted funds launched by DWS would rake in 1 billion euros in 2004. The 57 million euros subsequently raised in that year was underwhelming. Lupus Alpha, Germany’s first domestically registered hedge fund provider, launched later that year after raising 200 million euro. Lupus’ stated intention was to have 500 million euros under management by the end of the year. It failed to add to the initial figure.

Andreas Fink, spokesman at the Bundesverband Investment und Asset Management (BVI), a body representing the German mutual fund industry, is sanguine about industry progress. “These are still new products in the German market,” he said. “Development in the sector to date has been healthy, if moderate, and we do expect them to become more important in the medium term.”

Mr. Fink says BVI members manage a total of 1.3 billion euro in domestic hedge funds. This figure excludes funds managed by non-member Alpha Lupus. Anja Neukoetter, spokeswoman for BaFin, confirmed that as of March 10, the German regulatory body had registered 19 domestic hedge funds, 14 funds of funds and 11 offshore fund sof hedge funds (which need a license to distribute their products).

But clearly hedge funds are struggling to make headway among German investors. “To make the [hedge fund] product successful, we need at least one big company to push it through,” said Neumayer. “DWS failed to do so, and nobody has tried in a meaningful way since.”

German regulation is a stumbling block, according to some observers. On the product provider side, it is the product, rather than the manager, which is regulated. “It takes too long to get products to market,” complained Mr. Neumayer, who also said that on the demand side, investment process and risk management compliance are too demanding. “BaFin rules limit insurance and pension companies to a maximum 5% investment in hedge funds,” he explains. “But while reporting requirements are limited for other investments in their portfolios, if they invest in hedge funds they may have to report to their supervisory board on a quarterly basis.” He said that while BaFin’s hedge fund regulators are trying to cooperate with the industry, they have to live with existing rules which he described as “conservative and prohibitive.” Moreover, single hedge funds cannot sell to the public, members of which are only allowed to invest in funds of funds.

There are other factors impeding growth, including an overall industry performance that does not compare with the heights of 10 years ago (although volatility is far lower), and the recent strong performance of the equities markets.

Still, Mr. Neumayer remains hopeful. “We continue to believe there will be a good market for hedge funds in Germany if and when one of the larger players manages to get up a sizeable fund on the market,” he said. “If they deliver results, that will be the catalyst we need.”

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Contact Bob Keane with questions or comments at [email protected].


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