Are Hedge-Fund UCITS the Cure-All?

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

2. Context: A Muddled Regulatory Agenda Encourages Structuring HF Strategies As UCITS

risks of hedge funds, an understanding that may accentuate their preference for UCITS. For more than 90% of the respondents to our survey, recent developments such as the Lehman bankruptcy and the Madoff affair have made the investment community more aware of restitution risk. Results here are very similar for all categories of investors, except for CEOs and CIOs, who are more likely to think that the Madoff and Lehman affairs have increased awareness of this risk.

Each country also has its specific internal organisation for decision making, with negotiations and lobbying involving industry associations, ministries of finance, and the regulators. Because governments’ opinions do not always reflect those of professionals, initial stances may change. Very clearly, the final outcomes as well as the date for a vote on the AIFMD are unknown. The costs of complying with AIFMD can be split into two categories: one- off costs (legal and structuring costs) and ongoing costs (in particular, the costs of depositary controls). Although managers hope that some of these costs can ultimately be passed to investors if AIFM makes it possible to expand their distribution base or if there is true demand for regulated onshore funds, the uncertainties about the distribution of funds will, in the short term, at least, deter investors from making these compliance expenditures. The Madoff affair and the Lehman bankruptcy have had a profound impact on both investment professionals and political agendas. The Madoff affair, in brief, has shown that the obligations of the depositaries to return assets to investors are subject to legal interpretations and domestic discrepancies; on the political agenda now is a move towards a better definition and a strengthening of depositaries’ responsibilities. Investors, for their part, have better understood the non-financial 2.2 Madoff, Lehman and Investor Protection

Figure 8: Have recent developments made the investment community more aware of restitution risk? (all respondents)

2.3% Not at all 33.3% Somewhat 60% Very much so 4.4% I don't know

Naturally, there has also been an impact on investors’ decisions. Ninety-five percent of fund investors acknowledge the importance of operational risks in investment decisions, 75% claiming that this is a very important part of their investment decisions. Investors now systematically perform due diligence for operational risks, and they reportedly allow due-diligence departments to veto investment decisions.

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An EDHEC Risk Institute Publication