Northern Trust has enhanced its Hedge Fund Monitor solution with the addition of a new compliance module designed to support the demands of UCITS funds-of-hedge funds.
Newcits, or hedge funds that comply with UCITS guidelines, have garnered considerable industry and media attention, with over 200 UCITS hedge funds being launched in Europe.
Off the back of this growth, Newcits funds of funds have started to multiply. Iveagh Private Investment House, the Guinness family office and asset manager, recently teamed up with 47 Degrees North Capital Management to launch a Newcits fund of funds. According to a recent KDK Asset Management survey, 80% of the 30 fund of fund managers interviewed plan to launch a Newcits fund of fund in 2010.
There has been a huge amount of talk, and a certain amount of action, said Ian Headon, senior product manager for alternative asset servicing at Northern Trust. Of particular interest recently is fund of fund managers who are saying that there is a sufficiently big universe of investables in the UCITS hedge fund space to warrant the creation of a UCITS fund of hedge fund.
The logical step for Northern Trust is to provide the tools to assist our fund of fund clients to get ahead of what they expect to be a switch of an institutional investor moving from a Cayman fund of funds range into the UCITS fund-of-hedge funds range.
The new module from Northern Trust has added functions specific to restrictions and guidelines relating to UCITS funds. This assists managers in assessing a funds self-imposed strategy and geographical restrictions along with compliance with UCITS guidelines, Headon added.
Institutional investor interest in Newcits vehicles grew dramatically after the fallout from the Madoff fraud and the collapse of Lehman Brothers. Rehypothecation, gated accounts and illiquidity stung many investors, resulting in the adaptation of hedge fund strategies into UCITS funds; funds that must operate within a regulatory framework that imposes standards on liquidity, concentration risk and transparency.
It is therefore unsurprising to see interest for these products from U.S investors. “The US space classically has not had a culture of independent administration, and a lot of hedge funds are self-administered, said Headon. Post Madoff, post Lehman, we have seen a much greater interest than we have ever seen from US institutions investing into the hedge fund space demanding something that looks and feels more regulated than before.
Despite the catalysts of fraud and bankruptcy, it may be regulation that results in the biggest provocation towards Newcits vehicles. There is a sense that some of this trend is front running any difficulties that may arise from the AIFM Directive, continues Headon. The Directive is directed at non-UCITS, so by definition if I am in a UCITS fund then the Directive provisions do not impact me, in the short-term.
Although Newcits have won plaudits for regulation and accessibility, they have met stern criticism for a potential lack of return. A recent survey by the EDHEC-Risk Institute saw 69% of participants stating that the liquidity premium of hedge fund strategies will disappear and that performance will fall. Yet there may be a way round this problem.
According to Headon, Northern Trust regularly hears fund of hedge fund clients explain that although they will take positions at hedge fund managers who are launching UCITS vehicles, they will then overlay that investment with other assets. The message to investors is: We are going to take positions with hedge funds, but we will understand that UCITS hedge fund strategy so well, that we will overlay that strategy with equities, stock options, OTC derivatives where appropriate, said Headon. If, for example, the hedge fund is long/short equity but for whatever reason he had to strip out a certain strategy in order to [gain UCITS accreditation], if the fund of fund manager understands that, there may be a way for the fund of fund manger to protect the downside to achieve extra return.
Despite the ability and ingenuity of fund managers, the key tipping point will be the finalisation of the AIFM Directive, due on 6 July. If the ban on investing into hedge funds from countries without bilateral regulatory agreements with the EU remains, then Newcits will become a very popular gateway into Europe.