Hedge funds to make liquid strategy plans says study

Approximately one third of all hedge funds intend to launch a liquid alternative strategy, such as a UCITS or ’40 Act product, according to a survey by the Alternative Investment Management Association (AIMA), the hedge fund industry body, in conjunction with PricewaterhouseCoopers (PwC).

By Editorial

 Approximately one third of all hedge funds intend to launch a liquid alternative strategy, such as a UCITS or ’40 Act product, according to a survey by the Alternative Investment Management Association (AIMA), the hedge fund industry body, in conjunction with PricewaterhouseCoopers (PwC). 


Nearly half of UK survey respondents said they would launch a liquid alternative product over 2015 and 2016, compared to one third in the US, and just 14% in continental Europe, said the study – “Distributed Disrupted – A Spotlight on Alternatives.” The study found that 81% of firms managing UCITS reported an increase in Assets under Management (AuM), as did 87% of US managers of liquid alternative funds. Overall, half of all hedge funds told the survey they would launch a new investment vehicle by the end of 2016. 


Liquid alternatives have seen impressive growth as managers seek to diversify by adding UCITS or ’40 Act structures to their product ranges. Investors are seeking diversified returns, and are increasingly looking towards hedge funds and other alternative strategies as a means by which to achieve this. Likewise, managers are seeking a diversified investor base, and retail capital is often found to be sticky. 


Regulation has also played a part. There is continued uncertainty about the extension of the pan-EU distribution passport to third countries as mandated under the Alternative Investment Fund Managers Directive (AIFMD). At present, only Switzerland, Jersey and Guernsey have been told by the European Securities and Markets Authority (ESMA) that they meet EU regulatory equivalence to avail themselves to the passport. ESMA has informed the US, Singapore and Hong Kong that it requires more time to assess whether they meet equivalence to take advantage of the passport. 


Nonetheless, most non-EU managers said they would continue to use National Private Placement Regimes (NPPR) to market to EU institutions, as it looks increasingly likely NPPR will be maintained. Just 37% of non-EU AIFMs marketing AIFs under NPPR said they would gain Member State of Reference authorisation to passport if it were afforded to them. Others are simply focusing on UCITS. 


Liquid alternative funds in the US have excited a number of market participants although there appears to have been a slowdown raising the possibility of increased M&A in the sector. It was hoped that Defined Contribution (DC) pension schemes, which control approximately $5.1 trillion, would become major buyers of alternative mutual funds although progress has been slow. 


These ’40 Act hedge funds have also been subject to regulatory scrutiny from the Securities and Exchange Commission (SEC). In April 2014, the SEC said it would review operations at 25 liquid alternative managers. The SEC announced in September 2015 that it would introduce provisions restricting liquid alternative managers from holding more than 15% of their assets in illiquid instruments. This instruction came as the SEC expressed concerns that market volatility or a severe credit event could force liquid alternative managers to sell assets quickly to meet their redemption terms. The regulator argued any rapid fire sale of assets would hurt investors and potentially upset liquidity. 


Furthermore, the SEC urged liquid alternative managers to implement liquidity risk management procedures whereby assets are divided into liquidity categories. The SEC also said it would allow alternative mutual funds to introduce swing pricing.

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