Newcits Be Damned

Structuring hedge fund strategies as UCITS will distort strategies and diminish returns, according to a new risk study by EDHEC-Risk Institute
By None

Structuring hedge fund strategies as UCITS will distort strategies and diminish returns, according to a new risk study by EDHEC-Risk Institute.

The survey interviewed 437 and alternative asset managers, service providers and investors, with more than 13 trillion under management.

Newcits, or hedge funds that comply with UCITS guidelines, have stirred up excitement in the fund industry and the media. Brevan Howard, MAN Group and GLG Partners have launched UCITS hedge funds over the past year. LGT Capital Partners, an $18 billion alternative asset and fund of fund manager, recently launched a UCITS fund that will allow investors access into its Crown Managed Futures flagship fund.

However many respondents to the EDHEC survey feared that hedge fund strategies would need to be altered in order to fit into the UCITS structure. The liquidity demands of UCITIS funds led to 69% of participants stating that liquidity premium of hedge fund strategies will disappear and that performance will fall.

Much of the demand for Newcits comes from investors bound by quantitative restrictions, with 62.5% of insurance companies considering asking managers to repackage hedge fund strategies as UCITS.

The new directive on alternative investment fund managers (AIFMs) has also pushed managers towards Newcits, with 60% of alternative investment funds agreeing that the AIFM directive leads to uncertainty about the distribution of funds.

EDHEC is not the only institute that has called Newcits into question. PricewaterhouseCoopers recently issued a white paper concerning Newcits regulation. If some managers push at the boundaries too hard, there will undoubtedly be a reaction from regulators, which could act as a trigger for UCITS V, said Pat Convery, director, Taxation Services, PricewaterhouseCoopers.

Grellan OKelly, Senior Regulator with responsibility for the Derivatives and Risk Management Policy Group at the Irish Financial Services Regulatory Authority, commented within the report: I believe that the rules are strong enough and flexible enough to cope with this innovation. As ever, however, the hedge funds are pushing at the boundaries of gaining exposure to asset classes that you would not normally be able to gain exposure to in UCITS.

At present UCITS funds are worth $6 trillion, but only $30 billion is invested in alternative strategies. This allocation is set to increase according to KdK Asset Management, with 80% of established fund of hedge fund providers intend to launch some form of UCITS-investing vehicle over 2010.

EDHEC Report – Are Hedge-Fund UCITS the Cure-All?

PwC Paper Future Newcits Regulation

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