Are Hedge-Fund UCITS the Cure-All?

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

3. Structuring HF Strategies as UCITS

3.2.3.1 Participants fear the performance of hedge-fund UCITS will fall as a result of liquidity requirements Respondents to the survey fear (70% somewhat and 19% very much so) that hedge fund strategies have trouble meeting liquidity requirements, and that hedge funds will suffer from their inability to capture liquidity risk. Views of liquidity requirements A greater proportion of the managers (and the proportion of those located offshore greater still) of alternative funds think compliance with liquidity requirements will be a problem (figure 26b).

posed by hedge funds, and many of the objectives seem sensible. Unfortunately, the depositary model is expensive, and extensive opportunity costs are added by the constraints on liquidity and transparency. I would be surprised if the achieved reduction in risk actually outweighs the increase in costs in practice, so I guess we will see a split between UCITS and offshore hedge funds, with European investors compelled to pay these costs but non-European investors generally preferring cheaper, better-performing offshore products with lower costs. AIFMD will accelerate this process”.

Figure 26a: Views of liquidity requirements (all respondents)

The obligation to invest in liquid assets is difficult to meet for hedge fund strategies The obligation to invest in liquid assets is not necessarily appropriate for institutional investors The obligation to provide at least bi-monthly liquidity and generally more frequent valuation of units is unnecessary and burdensome The liquidity premium of hedge fund strategies will disappear and performance will fall

9.2%

69.5%

19%

2.3%

18.1%

46.2%

31.5%

4.2%

39.9%

39.7%

17.1% 3.3%

19.3%

52.4%

16.7%

11.6%

0

20

40

60

80

100

Not at all Somewhat

Very much so I don't know

Figure 26b: Views of liquidity requirements (offshore)

The obligation to invest in liquid assets is difficult to meet for hedge fund strategies The obligation to invest in liquid assets is not necessarily appropriate for institutional investors The obligation to provide at least bi-monthly liquidity and generally more frequent valuation of units is unnecessary and burdensome The liquidity premium of hedge fund strategies will disappear and performance will fall

4.2%

75%

20.8%

16.7%

25%

58.3%

25%

54.2%

20.8%

16.7%

58.3%

20.8%

4.2%

0

20

40

60

80

100

Not at all Somewhat

Very much so I don't know

45

An EDHEC Risk Institute Publication