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

More than 80% of respondents self- classified as sellers/managers/distributors of funds report that it is “somewhat” or “very” difficult to promote and distribute their own alternative funds in Europe.

After all, UCITS are the sole vehicle eligible for pan-European distribution. Once an investment has earned the UCITS designation in its home country (or is registered in a host country if it is a foreign fund), it can be marketed and distributed in other European countries, in keeping with the directives on the single market. In addition, a UCITS designation may also be the only passport for distribution to institutional investors (with the exception of pension funds). In addition, UCITS is an internationally recognised label, and European statistics show that UCITS are sold worldwide: 40% of UCITS are sold outside of Europe. After all, many regulators from Asia, the Middle East, and Latin America accept the distribution of UCITS within their borders to retail and other investors, who invest heavily in UCITS. The US, by contrast does not recognise UCITS as the equivalent of its domestic regulated funds. In short, a strategy packaged as a UCITS will be able to sell to any investor (retail or professional) in Europe, and to many investors beyond the borders of Europe. The UCITS framework has likewise enriched the list of eligible assets (CESR 2007 advice on eligible assets) and expanded the possibilities for leverage (recommendation EC/2004/383); so- called sophisticated UCITS, sometimes more vaguely called UCITS-III funds, allow a large number of alternative strategies to be packaged as UCITS. A more detailed description of these rules and of how each class of strategy complies with them is provided in chapter III.

Figure 12: How difficult is it to promote your own alternative/ hedge funds in Europe? (sellers only)

11.4% Not at all 54.3% Somewhat 27.1% Very much so 7.1% I don't know

Respondents to the EDHEC survey assert that the UCITS framework facilitates the distribution of funds. In addition, 90% of sellers, managers, and distributors agree “somewhat” or “very much” that the UCITS framework makes it much easier to promote and distribute hedge funds.

Figure 13: Does the UCITS framework make it a lot easier to promote and distribute hedge funds? (sellers only)

6.2% Not at all 33.3% Somewhat 55.2% Very much so 5.2% I don't know

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An EDHEC Risk Institute Publication