Are Hedge-Fund UCITS the Cure-All?

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

3. Structuring HF Strategies as UCITS

Figure 23: Opinion of funds of hedge funds

A more traditional way to access hedge fund performance is to invest in swaps (or other derivative instruments) based on indices of hedge funds, as financial derivative contracts based on indices of non-eligible securities are eligible for UCITS. Derivative investments in hedge funds thus limit fund of fund strategies to investing the majority of their funds in indices of hedge funds. There may be little interest in UCITS-managed funds of hedge funds, as they may resemble indexed funds of hedge funds, which can be managed passively and charge investors few additional fees or none at all. In addition, direct investments in hedge funds pose depositary problems. In France, depositaries currently have full responsibility for sub-custodian risk, so direct investments in hedge funds that do not have depositaries are a risk for them. In the UK and in Ireland, which require continuous due diligence, this process would also prove costly. Again, managed

account platforms make it possible to manage operational risks, so hedge funds on such platforms may comply with the UCITS requirement that target funds offer a degree of protection similar to that offered by regulated funds. All the same, the direct and indirect costs of these managed account platforms must be assessed. d) Relative-Value Arbitrage The Relative-Value Arbitrage style generally involves betting that pricing discrepancies between related instruments of a firm will disappear over time, and thus involves trading instruments of the same firms, with the use of borrowing and leverage. By extension, equity market neutral strategies, which trade highly correlated stocks, not instruments of the same firm, are generally considered Relative-Value Arbitrage strategies. Convertible arbitrage often involves a long position in the convertible debt issued by a firm and a short position in the stock, with leverage. 12

12 - The opposite position, long stock and short convertible debt, is often considered hard to build because non-stock securities are generally harder to borrow, and convertible debt will be harder still.

41

An EDHEC Risk Institute Publication