Ongoing success of Ucits-compliant funds
Regulation, transparency and liquidity: this type of hedge fund is capturing a large share of fund inflows.
According to Laurent Minvielle, Head of Funds of Hedge Funds at Edmond de Rothschild Investment Managers (EDRIM), investors continue to display a strong interest in Ucits-compliant alternative investment funds. "We consider that these products represent around half of the inflow into alternative management in Europe." It would appear therefore that the development of these "newcits" after the 2008 crisis was not just a flash in the pan, but rather a fundamental trend and these funds are gradually taking their place alongside offshore hedge funds.
"Ucits-compliant funds represent 10 % of offshore assets under management and almost 15 % at BlackRock", notes Riccardo Stucchi, Director of Institutional Sales at BlackRock France. The group manages 23.5 billion dollars in offshore alternative funds and already has 3.5 billion dollars in Ucits-format funds. Like BlackRock, numerous hedge fund managers have launched onshore ranges of funds in recent years to supplement their flagship offshore products.
However, some specialised players in the alternative management segment prefer to form partnerships with management companies experienced in Ucits-compliant funds in order to develop this activity. For example, Schroders offers in its Luxembourg Sicav Schroders GAIA three sub-funds managed by well-known UK alternative fund management companies, Sloane Robinson, Egerton and CQS.
"It is not simply a question of delegating management responsibilities. It is a genuine, exclusive partnership, explains Eric Bertrand, Director of Schroders GAIA. We provide them with the necessary Ucits infrastructure and our global distribution network capacity." Ucits-compliant alternative products have clearly opened the doors of alternative management to a new clientele. "As some clients do not have either the critical size or the necessary in-house resources to develop expertise in the selection of hedge funds they naturally turn to Ucits, which are operationally better regulated", confirms Riccardo Stucchi. Similarly, certain institutional investors that are not authorised for regulatory or internal reasons to invest offshore can include absolute performance Ucits-compliant funds in their portfolio. Family offices and other private banks are also more at ease, especially since the Madoff affair, with funds regulated in Europe. The regulatory aspect is clearly the main advantage of newcits in the eyes of investors. "From an operational point of view, the Ucits format is very reassuring for investors because it is not only very regulated, but also transparent and liquid", notes Riccardo Stucchi.
The other side of the coin is that not all alternative investment strategies can be replicated in Ucits format since the regulation imposes additional constraints. "Numerous strategies based on illiquid assets cannot be replicated in the Ucits format since they cannot comply with the weekly liquidity requirement, says Eric Bertrand. Similarly, certain concentration and leverage limits must be respected. It is important therefore to exercise caution when comparing the performance of an offshore fund and its replicated Ucits. Investors need to check whether or not the portfolios are similar."
For some strategies, the switch to the Ucits format does not change (or only marginally) the portfolio’s composition, which means that investors can expect a risk-return trade-off close to that of the offshore fund. However, for others, the management objective is different. "An investor that benefits from the liquidity of a Ucits must accept a slight underperformance: offshore funds and Ucits should therefore be seen as complementary rather than in competition", stresses Riccardo Stucchi. It is however sometimes difficult to get the complementary message across to investors who wrongly tend to see Ucits-compliant alternative funds as simple products, whereas they are still an alternative management product. "Not all investors realize that, before investing, they should carry out the same due diligence checks for a Ucits fund as they would for a hedge fund, since the newcits involve complex financial risks, liquidity risks and, for swap based products, a counterparty risk", comments Laurent Minvielle. An increasing number of Ucits products replicate the performance of a hedge fund via a swap provided by an investment bank. "We insist in particular on the importance of the independence of the parties involved in the construction of this type of product", adds Laurent Minvielle. In addition to multi-management services, his team now offers assistance to institutional investors wanting to select hedge funds directly.