Hedge fund demand for European IPOs falls

Hedge funds are taking less interest in Europe's initial public offerings as they cut back on risk, a factor which is hitting the prospects of some new listings. Bankers and sales staff say that in recent months hedge fund orders for stock in some IPOs has fallen by as much as a quarter, making it harder for them to price their offerings within marketed ranges. Hedge funds had been among the biggest buyers of new share issues but recent market turmoil has hit their performance and desire to take on risk. Bankers said that though it varies over different deals, the last few months has seen average hedge fund involvement fall to below 30 percent from 40 percent.
"Hedge funds are having the worst time ever and the risk profile of their investments has definitely become more cautious," said one sales trader who sells to hedge funds and declined to be named. "With respect to IPOs, they used to take big chunks of them until recently, now they merely dabble," he said.
Traders said that last week's listing of navigation company TomTom was an example where some hedge funds effectively dabbled by buying but then immediately sold, or flipped, the stock back to minimise the risk. The Dutch company's stock fell over 7 percent below issue price in the first hour of trade but recovered to rise as much as 4.7 percent on the same day.
Hedge fund involvement in Thursday's listing of Russian steel company Evraz was particularly low, a person familiar with the transaction said. The deal priced within its range due to demand from emerging-market funds, he said.
"Hedge funds have been very big takers of IPOs in the last year," said Michael Browne, manager of the Sofaer European fund, at Sofaer Global research. "The natural reaction when a long-only manager says 'I don't know' (is) he builds cash - when a hedge fund manager says it, he cuts both long and short positions," he said.
The EuroHedge Composite Index of hedge fund returns was down 0.50 percent in April. This was the worst performance since the liquidity crunch triggered by the collapse of US based Long Term Capital Management nearly eight years ago, with preliminary returns for May showing the likelihood of another tough month.