A growing number of US alternatives managers are looking to establish UCITS when soliciting EU investors despite the introduction of the Alternative Investment Fund Managers Directive (AIFMD).
This comes as a growing number of managers look towards liquid alternatives such as UCITS or ’40 Act funds in the US as a mechanism to increase their asset base through accessing new sources of capital. A study conducted jointly by the Alternative Investment Management Association (AIMA), the Managed Fund Association (MFA) and KPMG found 26% of hedge funds expected to develop at least one alternative UCITS within the next five years.
“It all comes down to supply and demand. We are seeing a growing number of US managers look to raise capital through UCITS in the EU. This is a contrast with what we are seeing with the emergence of AIFMD. The demand for alternative UCITS in the EU is encouraging,” said John Delaney, executive director at the hedge fund consulting business at J.P. Morgan prime brokerage, speaking at the Liquid Alternatives Strategies Global conference in London.
Non-EU manager interest in AIFMD has been muted for a number of reasons. This is partly driven by the uncertainty around the Directive and whether the passport, which permits managers to distribute their funds freely across the EU, will be extended to certain jurisdictions. In July 2015, the European Securities and Markets Authority (ESMA) confirmed Jersey, Guernsey and Switzerland met regulatory equivalence to take advantage of the passport, but added other major fund jurisdictions such as the US, Hong Kong and Singapore required more time to assess.
ESMA confirmed these country assessments will be done individually and this might take some time. As such, some non-EU managers are electing to rely on the national private placement regimes (NPPR) permitted under AIFMD, which might not expire for several years. Others are, however, simply establishing onshore UCITS structures as it is a brand they are familiar with – unlike AIFMD.
UCITS is a respectable brand and widely considered to be the most coherent mutual fund brand in the world. Its investor base is not just geared around Europe but also in Latin America and Asia-Pacific. A growing number of market participants do believe an AIFMD brand could rival UCITS. Eighty-seven per-cent of respondents to a survey by Multifonds in 2015 predicted AIFMD could rival UCITS, although conceded this would take time to emerge and was contingent on the success of the passport.
One fund manager panellist said UCITS and onshore products had an advantage over offshore fund structures when soliciting to EU pension funds and insurance companies, an investor base with around $7 trillion in assets. “Regulators in a number of EU jurisdictions – such as Germany, France and Spain have made it hard for these investors to buy offshore funds. But the regulators are not stopping them from gaining exposure to UCITS and this is something alternative UCITS managers should take note of,” he said
Some large pension schemes and insurance companies are even contractually prohibited from buying into alternative funds by their shareholders. A number of allocators writing major tickets cannot invest in small or mid-sized hedge funds due to risk and concentration fears, for example.
UCITS have performed reasonably over 2015. The Hedge Fund Research UCITS (HFRU) Hedge Fund Composite Index delivered gains of 2.19% year-to-date, while Preqin estimates UCITS hedge funds run approximately $199 billion in assets. Interest in UCITS hedge funds increased dramatically following the financial crisis as investors looked towards liquid, regulated and transparent fund structures. As such, 152 UCITS products came to market in 2010, although this declined markedly over 2014. However, Preqin said it expected launches to increase and stabilise.