New research from EDHEC Risk Institute has found that UCITS Hedge funds underperform their non-UCITS rivals.
The research, drawn from the Newedge research chair on “Advanced Modelling for Alternative Investments” at EDHEC-Risk Institute, is set against the backdrop of the convergence of mainstream long-only asset management and alternative hedge funds, which has recently gathered significant momentum. However, despite their underperformance, the research finds UCITS hedge funds have more favourable liquidity terms and when comparing liquidity-matched groups of UCITS hedge funds and non-UCITS hedge funds EDHEC-Risk finds that their performance seems to converge.
The EDHEC-Risk Institute study examined an aggregate hedge fund dataset that consisted of more than 24,000 unique hedge funds.
Two main forces are currently accelerating the convergence trend, says the research. The first of these forces, from the supply side, was the amendment of the UCITS framework, which allowed mainstream fund managers to supply regulated forms of hedge fund-type products to their traditional customer base, while also permitting hedge funds to reach out to the same customers.
This research paper, titled ‘An Analysis of the Convergence between Mainstream and Alternative Asset Management’, examines the convergence between the mainstream and the alternative asset management industry by studying UCITS and non-UCITS hedge funds. The paper also provides an academic analysis of the main techniques that are currently used by hedge fund managers and that could be transported to the mutual fund and alternative UCITS space in a straightforward manner so as to provide better forms of risk management in a regulated environment.
The research finds alternative investment fund managers are increasingly deciding to implement alternative strategies through traditional investment vehicles such as mutual funds in order to access assets from retail and institutional investors that, for various reasons (such as investment mandates, for example), cannot invest through less regulated structures.
The latest amendment of the UCITS framework, referred to as UCITS III and
IV, allows mainstream fund managers to supply regulated forms of hedge fund-type products (UCITS hedge funds) to their traditional customer base, while also permitting hedge funds to reach out to the same customers.
UCITS hedge funds follow a hedge fund type strategy aiming to generate absolute return or absolute performance. They are, in other words, simply UCITS that take advantage of certain investment techniques allowed by the UCITS regulations which enable them to pursue strategies that were previously more common in the alternative investment sector – in particular, the hedge fund sector
Their popularity has grown, with a recent Pertrac study showing that alternative UCITS Assets under Management (AuM) peaked at €178.82 billion in May 2011.
Commenting on the results of the latest EDHEC-Risk Institute study, Noël Amenc, Director of the Institute, said: “Investors are increasingly considering hedge funds as part of their investment universe, but are also searching for access to sophisticated risk management techniques within the regulated and transparent world of mutual fund products. We are delighted that this study supported by Newedge has been able to shed light on the way in which techniques are converging in the mutual fund and hedge fund universes and we think that the research will be of particular interest to institutional investors”.
By merging data on UCITS funds from the EurekaHedge, BarclayHedge, and HFR databases on UCITS hedge funds, EDHEC-Risk Institute also constructed an aggregate database on UCITS hedge funds and carried out a comparison of both these and non-UCITS hedge funds.
The merged data showed that non-UCITS hedge funds generally have lower volatility and tail risk than UCITS hedge funds, which is consistent with hurdles to the transportation of risk management techniques.
The research also finds important domicile effects related to firm and fund performance. European-domiciled funds deliver lower risk-adjusted compared to funds domiciled in other regions. The risk-adjusted performance is highest for North American and Asia/Pacific-domiciled funds. EDHEC-Risk Institute finds similar performance between the main UCITS hedge fund domiciles. “Ireland and Luxembourg-domiciled funds exhibit very similar performance measures,” says the paper.