The human tsunami of refugees created by ISIS’ unprecedented and unchecked rise in the Middle East may prove to be a greater barrier to hedge fund gains than the on-again-off-again FOMC rate hike. Any FOMC rate hike would likely impact hedge funds with equity strategies first and, one could argue, with greater negativity than funds pursuing other strategies.
However, recent media coverage highlighting the Syrian and other refugee influx into Europe, particularly Germany, should give us pause.
What’s the Problem?
In the same way investors fled the plunging Chinese market for relative safety in India and beyond, the peoples of the Middle East are fleeing the horrors and economic disruption heaped upon them by ISIS and related terror groups. The nearest refuge is Europe and the nation within Europe demonstrating the greatest largesse is Germany.
Coincidentally, Germany is the epicenter of the European Union’s economic might and, its pledge to welcome some one-million of these unfortunate persons into the country is certain to have a negative impact on the German economy.
Germany’s population is about a quarter of the U. S. population, standing at 82.6 million, of which 0.31% are currently defined as irregular immigrants, a broader term than the illegal immigrant expression used in the United States. This translates to around 2.6 million people.
Recently, the German government agreed to accept an influx of 800,000 to 1 million Syrian refugees, which increases Germany’s immigrant population by one-third. This would be the equivalent of the U.S. accepting 3.8 million refugees, given the fact that the U.S. illegal immigrant population stands at an estimated 11.7 million.
No reasonable person could make a credible case that this influx will not have an adverse impact on the German economy. More to the point, as goes the German economy, so goes the European economy. Europe has already experienced a significant economic slowdown, so this wave of immigration is ill-timed at best.
The International Monetary Fund ranks Germany as the 5th largest economy in the world and the largest economy, in terms of GDP, in the European Union. The United Kingdom is a distant 10th and Italy is at number 12. The remaining members of the European Union appear much further down the list—Sweden, for example, is in 41st place and Hungary, much criticized for its unwillingness to accept these refugees, is 57th. Moreover, the Hungarian per capita income is about 46% less than its German counterpart’s.
At the nexus of these geopolitical and economic concerns lay the hedge fund industry.
No Strategy Is Immune to this Perfect Storm
We have already seen the market correction in equities deal a blow to hedge funds with long, long/short and other equity driven strategies. Events in Asia, China in particular, have not been kind to emerging market funds and the strengthening U.S. dollar has wreaked havoc on many funds pursuing currency strategies.
In short, hedge fund managers are facing enormous challenges. They have not faced any combination of events so potentially catastrophic since the 2008 financial crisis. The coming weeks and months will determine whether or not they are up to the task.