GERMANY - Investor demand for German-domiciled hedge funds, which made their debut at the start of 2004, should grow to an average of 47 billion euros four years from now, according to a study by RCP & Partners.

The rating agency calculated the expected average demand for the new products – representing 5% of the total German fund market – based on estimates from 40 different hedge fund managers. According to RCP, the managers’ estimates for German hedge fund demand by the end of 2008 ranged from as little as 10 billion euros to as much as 200 billion.

RCP puts inflows so far at 1.2 billion euros so far this year. The rating agency attributed this to three factors, including a “sluggish approval process” at German financial services regulator BaFin, underwhelming performance of hedge funds this year and general scepticism towards the products among German investors.

But other hedge fund experts disagree that BaFin’s approval process had anything to do with the sluggish start of German-domiciled hedge funds.

Speaking at a roundtable in Frankfurt last night, Frank Herring, partner at the law firm Norton Rose Vieregge, argued that if hedge fund providers had done a better job of completing the necessary paperwork, BaFin would have been far quicker to approve their products.

“I would go even one more and say that we in the hedge fund industry should be thankful to have a regulator like BaFin,” added Michael Vogt, managing director at Cominvest, who, like Herring, attended the roundtable sponsored by the asset management boutique Lupus alpha.

According to Christoph Braun, partner at Lupus alpha, the single most important reason why hedge funds have not yet taken off in Germany has to do with the natural scepticism among German investors, particularly institutional ones.

“Those in the industry who had high expectations for demand were simply not patient enough. The German investor needs time to get to know these products and realise that they will be crucial for diversification and performance,” he said.

Braun warned institutional investors, however, against relying too heavily on the more conservative strategy of investing in fund of hedge funds. “The product may certainly afford them more security than single hedge funds, but on the other hand it could be an entrance ticket to the world of mediocrity,” he said.

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