There is a sharp disconnect between the amount of money pulled in by European-focused hedge funds and how well they perform, suggesting this $492 billion industry needs to raise its game before clients revolt, according to Cerulli Associates.

There is a sharp disconnect between the amount of money European-focused hedge funds pull in and how well they perform, suggesting this $492 billion-industry needs to raise its game before clients revolt, according to Cerulli Associates, the consultants.

The firm analysed performance to find that the sector generated a return of just 2.1 per cent in the first half of this year, less than a third of the 6.7 per cent returned by the benchmark STOXX Europe 600 Index of equities. Yet during that period, the sector managed to pull in a total of $31.1 billion, almost the same amount as the US-focused sector, which is almost three times as large.

"Hedge funds last outperformed European stocks in 2008, when hedge funds fell 17.4 per cent as measured by the Eurekahedge European Hedge Fund Index, and the STOXX Europe 600 slumped 43 per cent," says Barbara Wall, Europe research director at Cerulli Associates.

"Since then, they've been battling government intervention, pressure from regulators, record low interest rates, and a fall in volatility, which have hampered managers' ability to deliver," Wall said.

Cerulli associate director David Walker notes: "Allocators are worried that hedge fund managers are not taking sufficient risks in their portfolios to generate satisfactory returns. But the opportunities are growing. Companies are awash with cash and looking for acquisitions. The near collapse of Portugal's Banco Espirito Santo and Argentina's recent debt default together with growing unrest in Ukraine and the Middle East have rocked the markets. Perhaps it is time for some of these hedge fund managers to start earning their money."

Among other findings from Cerulli that apply to the “alternative” space is the observation that more than 80 per cent of global private equity firms intend to raise capital in the next three years and expect their next fund to be equal to or larger than their last. Most are expected to appeal to high net worth individuals, who will often seek opportunities in industries or sectors with which they are familiar.