Hedge fund returns threatened by UCITs structure

Research by EDHEC-Risk Institute reveals fear that structuring hedge funds as UCITS will distort the funds’ strategies and diminish returns.

The Institute surveyed UCITS and alternative asset managers, their service providers, external observers, and investors for their views on structuring hedge fund strategies as UCITS – the 437 respondents have a combined assets under management of more than €13 trillion.

In particular the survey found participants were worried about distortion of strategies through a disappearance of the liquidity premium, with 69 per cent reporting this change would cause performance to fall.

The survey suggests that institutional investors bound by quantitative restrictions will ask funds managers and distributors to repackage hedge fund strategies as UCITS. For instance, 62.5 per cent of insurance companies envisage asking promoters/managers to restructure hedge fund strategies as UCITS.

For their part, managers of alternative funds are concerned by the uncertainties surrounding the directive on alternative investment fund managers (AIFMs) and may consider packaging their strategies as UCITS. Sixty per cent of alternative investment funds (AIFs) very much agree that the AIFM directive leads to uncertainty about the distribution of funds; 65 per cent of AIFs plan to restructure their funds as UCITS, whereas 25 per cent do not.

EDHEC-Risk suggests improved regulation of investment funds and properly designed incentives: incentives to invest in illiquid assets could be designed in regulated closed funds with a fixed horizon; incentives to adopt the AIFM directive must be given by modifying the prudential regulation of European institutional investors, notably insurers, and authorising them to invest directly in funds that comply with the AIFM directive; incentives to manage rather than to insure non-financial risks must be given by defining more clearly the responsibilities of distributors, asset managers, depositaries, and valuators.