In a paper published today, LJH Global Investments, the Florida-based hedge fund advisory firm, is skeptical about the performance prospects for the long/short equity funds that have proliferated in Europe in the last few years. It says company stock prices in Europe are refusing to respond to strong fundamentals, monetary loosening is limited, and LJH also doubts the dexterity of European hedge fund managers at shorting, since most managers were until recently employed by large long-only fund managers.
LJH is more positive about European convertible arbitrage funds, which have benefited from weaker equity markets, post-September 11 volatility and a flood of new issues. The main risk, says LJH – in the absence of an unexpected rise in European interest rates – is the growing reliance of convertible issuers on hedge fund arbitrageurs rather than traditional long only investors. The third category of strategy examined by LJH – risk arbitrage – is hampered by the quietude of the European M & A scene, which the firm does not expect to change for another 12 to 18 months.