Are Hedge-Fund UCITS the Cure-All?

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

3. Structuring HF Strategies as UCITS

metals are forbidden, but this prohibition is subject to debate and is not uniform in all jurisdictions. The CESR’s recommendation on eligible assets has extended the list of eligible assets by allowing investment in indices representative of such non-eligible assets as commodities or hedge funds and in non-leveraged collateralised debt obligations. The CESR has also exempted

Figure 21: More than 70% of live HFs in each strategy meet UCITS VaR requirements The right-hand side of the graph shows that at least 70% of the funds in each strategy would pass a VaR test. The pass rate is 70% for CTAs/CPOs, 75% for Relative Value, more than 85% for Equity Long/Short and 95% for Funds of Funds or Multi-Strategy. It is virtually 100% for the remaining strategies at the end of 2009. Rolling through the time series shows the cyclicality of the VaR measurement, with swift increases after crises. Particularly concerned were the Event-Driven and Global-Macro types, although the large spikes for these strategies also reflect the few funds in these two categories. Here, a limited number of losses in major hedge funds modify the statistics, especially when these funds implode. At the other extreme, Funds of Funds and Multi-Strategies proved particularly stable—if anything, they seem to offer a protection from the risk of implosion.

6 - Article 34 of the UCITS directive states that “A UCITS must make public in an appropriate manner the issue, sale, repurchase or redemption price of its units each time it issues, sells, repurchases or redeems them, and at least twice a month. The competent authorities may, however, permit a UCITS to reduce the frequency to once a month on condition that such a derogation does not prejudice the interests of the unit-holders”, but we are not aware of such a disposition being applied in any but exceptional times.

investments in financial indices from quantitative restrictions such as those on concentration risk. Liquidity constraints and periodic valuation-surrenders UCITS are required to invest in liquid assets; in practice, they must be able to value their units at least twice a month 6 and comply with their expectations of surrenders—in all cases, investments must allow at least 20% of the assets to be redeemed.

We find that, on average, 85% of live hedge funds (as of November 2009) would pass UCITS VaR requirements. This result is consistent with previous studies that show that hedge fund strategies are no riskier than traditional or UCITS strategies. Eligible assets UCITS, in brief, must invest in liquid financial assets. They may not invest in non-financial assets or commodities (except through cash-settled derivatives). In addition, investments in precious

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