An alternative investment strategy, UCITS funds have gained popularity in recent years, and investors have flocked to these vehicles in search of higher liquidity and transparency. Put simply, UCITS hedge funds are vehicles that use hedge fund strategies while following the UCITS directives of the European Union. This allows them a wider customer base by the using a single domicile based in any of the Eurozone countries. While the bulk of UCITS are owned by European-based managers (86%), a smaller percentage (12%) are also run by managers based in the U.S.
Opalesque‘s July issue of UCITS Intelligence covers the performance of UCITS hedge funds through this year so far and also looks at the future prospects for this strategy. UCITS which generate absolute performance had a record high number of assets in 2011, at €178.82 billion ($232.5 billion). Currently the total assets are at €163 billion. Like ordinary hedge funds, UCITS also have the largest number of assets allocated in the equity long/short strategy, that was up 3.34% YTD, the highest gain among the eleven UCITS strategies.
UCITS lagging ordinary hedge funds
The best performing UCITS hedge funds have been Clareville Capital’s Pegasus Fund, AUM $100 million, which returned 28%; Odey Asset Management’s UK Absolute Return Fund, $1 billion, was up 24%; and surprisingly an equity CTA took the third spot. Dunn Capital’s ML DUNN World Monetary and Agriculture Fund has gained 21% through the first half of this year. Another interesting bit about Dunn WMA UCITS, AUM$350 million is that the fund bottomed at -20% return in 2012.
Despite these shining gains, UCITS have continued to underpeform standard hedge funds—in Q1 UCITS hedge funds returned 2.46% compared to 3.22% for hedge funds.
Are UCITS hedge funds less risky?
In Opalesque’s discussion panel, most of the managers said that the reason they started offering a UCITS platform was that their clients requested opportunities to invest through these directives and wanted the protection and transparency that these vehicles could deliver. They added that even though UCITS seem to be more regulated and less riskier than offshore funds, the managers said that the risks are essentailly the same. The tighter regulation of UCITS does not mean that there is lesser risk, while the latter has to do with structural compliance, the former is more concerned with operational accidents.
Another concern that has gripped investors and managers alike is the new regime of AIF, Alternative Investment Fund, directives that will be implemented in Europe. These new regulations will not only govern the performance of UCITS, hedge funds but the asset management industry on the whole. The new regulations, which will also include the UCITS V directive, will enhance transparency, promote reporting and will attempt to control fund leverage. Previously Preqin’s survey has noted that North American managers are less prepared for the new AIFMD regulations than the European ones.
It appears that the best feature of UCITS is higher liquidity, as the overall returns of these vehicles lag the hedge fund industry.