Are Hedge-Fund UCITS the Cure-All?

Are Hedge-Fund UCITS the Cure-All? — March 2010

1. Presentation of the EDHEC Risk Survey

As part of the CACEIS research chair on risk and regulation in the European Fund management industry, EDHEC has done an in-depth review of depositary rules in Europe, and in its response to the European Commission’s consultation on the depositary function it asserts that these rules are no longer suited to current asset management techniques or, more broadly, to the changing UCITS framework. Sophisticated UCITS, which can be used to distribute hedge fund strategies, are a perfect illustration of the problems posed by non-financial risks in the fund industry. Our view is that structuring hedge funds as UCITS, a trend acknowledged by survey respondents, is bound to become more common. This study thus attempts to respond to four broad questions: • Are UCITS strategies appropriate in this context? • Does packaging hedge fund strategies as UCITS mean distorting the strategies? If so, will it also alter their expected returns? • Is the UCITS framework really appropriate or is this trend exploiting a weakness in the regulations? • What are the operational consequences of this repackaging? 1.1 Main Sources of Information Our study pays particular attention to the UCITS directive, including the 2004 EC recommendation that paved the way for the creation of sophisticated UCITS, and the CESR recommendations on eligible assets (CESR 2007). In addition, we evaluate the current state of negotiations on the

directive on alternative investment fund managers (AIFMs).

We rely on the CISDM database for the quantitative analysis of hedge funds. This paper focuses on post-1987 returns on the grounds that the hedge fund industry was of a different nature before that period, and because a shorter time period enables visual identification of the characteristics of the recent business cycle. 1.2 Survey EDHEC has surveyed UCITS and alternative asset managers, their service providers, external observers such as regulators and trade bodies, as well as fund investors for their views on structuring hedge fund strategies as UCITS. The assets under management (AUM) of the 437 respondents to the survey amount to more than € 13 trillion. 2 As these numbers overlap, a more relevant figure may be the € 7 trillion of AUM reported by fund managers.

2 - We estimate aggregate AUM by adding the median values of each bucket. For instance, we “allocate” € 30bn to a respondent who reports AUM in the € 10bn– € 50bn bucket. Those who report AUM of more than € 100bn are estimated to have AUM of € 150bn.

Figure 1: Respondent type

46% Managers 18.9% Advisory-consulting 18.5% Fund investors of which, institutional investors 5.8% Asset management servicing 5.1% Distributors 5.1% Investment services providers 1.8% Regulators

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An EDHEC Risk Institute Publication