Are Hedge-Fund UCITS the Cure-All?

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

3. Structuring HF Strategies as UCITS

Figure 22c: Opinions from institutional investors (multiple choice)

8 - An additional UCITS requirement is that the Value-at-Risk be less than twice the Value-at-Risk of a derivative-free risk benchmark, but, as the respondents to our survey note, this relative indicator is irrelevant to most strategies, and they can get around this constraint by failing to specify a benchmark in their prospectus (or alternatively select a risky type of benchmark rather than a money-market or low-duration bond-type benchmark).

3.2.2 Analysis for Each Strategy Most hedge fund strategies, as we have seen, would meet UCITS VaR requirements— though not necessarily all other UCITS requirements—for monthly VaR of less than 20%. 8 Here we review opinions of the main strategies, and describe how these strategies fit in the UCITS framework in light of constraints regarding liquidity, short-selling, counterparty risk, concentration risk, and eligibility of assets. a) Equity Long/Short The Equity Long/Short class encompasses a great variety of styles, such as equity strategies that are neither market neutral nor part of a hedge on other firms’ instruments; it includes short-only and long-only strategies, a sector/country focus, emerging, and generally directional equity strategies.

Respondents are most familiar with Equity Long/Short and Fund of Fund/Multi- Strategy. They think that Equity Long/ Short will be the first strategy to relocate to Europe and be repackaged as UCITS. The strategies respondents believe are the hardest to package as UCITS are the event- driven and relative-value types. The managers of hedge funds and other alternative investment funds respond in much the same ways as respondents as a whole, but they question the ability of relative value strategies to comply with UCITS regulations. This latest point is interesting, because relative value funds, as we will see, pass the most notorious of UCITS requirements: the leverage or Value-at-Risk constraint. However, relative value funds may not meet other quantitative restrictions such as mandatory diversification ratios.

37

An EDHEC Risk Institute Publication