Are Hedge-Fund UCITS the Cure-All?

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

3. Structuring HF Strategies as UCITS

leverage (or to enter less profitable arbitrage strategies better to diversify).

modification of the nature of the firm or of its securities after restructuring not only requires controls and due diligence but also poses problems of safekeeping (for instance, when a company goes private, property rights must be properly verified). Merger/Risk arbitrage funds generally buy the stock of the company being acquired while shorting the stock of the acquirer. These strategies are often diversified, as many merger operations are often taking place at the same time. Leveraged strategies, however, may be bound by limits on concentration risk (it is easy to have more than 5% invested in a single security after leverage), so some of these strategies may need to reduce leverage or to diversify artificially by entering into merger deals more systematically. Securities used in merger arbitrage may also become illiquid, so liquidity risk must be monitored with care. Event-Driven multi-strategies, with their greater diversification, are more compatible with the UCITS framework.

e) Event-Driven Event-Driven strategies encompass distressed securities, merger arbitrage (also called risk-arbitrage), and event-driven multi-strategy. They are considered themost difficult strategy to restructure as UCITS. All categories of respondents think Event-Driven strategies are difficult to repackage as UCITS (dotted bars higher than red bars). The distressed-securities strategy focuses on restructuring companies below investment grade, and it involves significant credit and liquidity risks. These strategies should, in theory, be excluded from the UCITS universe because of the long holding horizon (usually more than a year) and because of their generally very illiquid nature. In addition, the role of the depositary is made more complex for these strategies, as the possible

Figure 24: Opinion of all respondents

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