Hedge funds are seeing growing interest from Europe’s retail investors, who are set to outpace their institutional peers in terms of growth in demand for the asset class.

More than a third (37%) of the European private banks and wealth managers surveyed by Cerulli Associates expect to increase their recommended allocations to hedge funds in 2022, compared to just 16% of institutional respondents.

Institutional investors are more likely to have exposure to hedge funds than retail investors in the region. However, some retail investors, especially family offices and high-net-worth (HNW) individuals, have higher exposure to hedge funds – often more than 5% of their total investment portfolios.

“The United Kingdom looks set to continue showing the highest demand for hedge funds, with 24% of the institutional investors expecting to increase their allocations over the next 12 months, compared to only one in 10 in Italy, the lowest of any of the five countries,” says Fabrizio Zumbo, director, European asset and wealth management research, at Cerulli.

In the retail segment, UK private banks expect demand for hedge funds and liquid alternatives to be higher in each client segment than in the other European markets. Ultra-high-net-worth (UHNW) clients in the country are expected to show the greatest demand for hedge funds: local private banks expect 56% of such clients to increase their demand for the asset class.

More than a third (38%) of the Swiss private banks expect the greatest increase in demand for hedge fund products to come from local family offices. Italian private bank respondents paint a varied picture of their client base. They expect the strongest demand for hedge funds to come from UHNW individuals, family office demand for hedge funds to remain practically flat, and mass-affluent clients to show reduced demand for hedge funds.

Overall, French private banks expect demand for hedge funds from both mass-affluent and HNW clients to fall. The only clients set to show a net increase in demand over the coming one to two years, according to local private bank respondents, are UHNW clients. More than a third (38%) anticipate increased demand for hedge funds from this client segment.

“Hedge fund managers and their distribution teams should dedicate more time and resources to targeting retail distribution channels, focusing on cross-selling opportunities in this segment,” says Zumbo.

Across Europe, 92% of family offices have allocations to hedge funds, making them the client type most allocated to the asset class; 16% allocate more than 5% of their total investment portfolios to hedge funds. Mass-affluent clients are the retail client type least allocated to hedge funds: one in eight do not allocate to the asset class.

Nearly 32% of UK private bank respondents say local family offices invest 6% to 10% of their portfolios in hedge funds, including UCITS funds. Italian retail investors have relatively high allocations to hedge funds: 15% of family-office and 17% of mass-affluent clients allocate more than 5% to the asset class.

All of the private banks Cerulli surveyed in Switzerland say local family offices already have exposure to hedge funds, typically 1% to 5%. German retail investors currently have the lowest allocations to hedge funds in Europe. More than a third (36%) of the country’s mass-affluent clients do not hold hedge funds, and nearly a quarter of HNW clients.