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

Figure 9: How relevant are restitution or other operational risks to your investment decisions? (fund investors)

Box 2: The Madoff affair and depositary problems

The Madoff affair can be summarised as a large non-financial loss and a failure to return the assets of a UCITS retail fund. This failure to return assets of a UCITS raises awareness of the varying interpretations of the obligations of depositaries; in particular, there is a notion that depositaries’ responsibilities are greater in France than in Luxembourg. A large proportion of French savings is invested in UCITS funds that are produced in Luxembourg. This proportion could increase with the UCITS IV directive that recognises the master- feed structure and allows funds the domiciliation of funds virtually anywhere in Europe. This potential investment of French savings in funds domiciled in less protective jurisdictions worries the French regulator, whose mission is to ensure the protection of domestic investors. This heterogeneity is also a problem Europe-wide, as it undermines the single market for funds. It has even become a problem for Luxembourg authorities, as they would rather end-investors not be sceptical of the protection they are offered when they invest in funds domiciled in Luxembourg. The subsequent political agenda springs from a desire for the homogenisation and strengthening of the obligations of depositaries. Acting on this agenda will, of course, increase the prices for depositary services; depositaries may even need to charge an additional fee tantamount to an insurance premium.

2.5% Not at all 20% Somewhat 75% Very much so 2.5% I don't know

Figure 10: How relevant are restitution or other operational risks to your investment decisions? (AIFMs who report that they are principally buyers of funds)

7.1% Not at all 7.1% Somewhat 85.7% Very much so 0% I don't know

In general, it seems that the Madoff affair and Lehman bankruptcy have whet investors’ appetite for UCITS. As they were meant primarily for retail investors, UCITS were designed to offer the greatest degree of protection.

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An EDHEC Risk Institute Publication