Are Hedge-Fund UCITS the Cure-All?

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

Executive Summary

The directive on alternative investment fund managers (AIFMs) will not necessarily allow professional investors to buy the funds offered to them. Controversy around the directive, together with uncertainty about the distribution of funds it will allow, will deter investment firms from making the investments to comply with the expected requirements of the AIFM directive. By contrast, as UCITS regulation offers greater possibilities for leverage and more admissible assets, UCITS appeal to both fund investors and managers. EDHEC surveyed UCITS and alternative asset managers, their service providers, external observers such as regulators and trade bodies, as well as investors for their views of structuring hedge fund strategies as UCITS; the work is part of the CACEIS research chair on non-financial risks in investment funds. The assets under management (AUM) of the 437 respondents to the survey amount to more than € 13 trillion. 1 Investment fund managers account for roughly € 7 trillion of these assets. In general, the survey suggests that institutional investors bound by quantitative restrictions will ask fund managers and distributors to repackage hedge fund strategies as UCITS. For instance, insurance companies envisage (12.5% “somewhat” and 50% “very much so”) asking promoters/ managers to restructure hedge funds (HF) strategies as UCITS.

Do you envisage asking promoters/managers to restructure HF strategies as UCITS? (insurance companies)

25% Not at all 12.5% Somewhat 50% Very much so 12.5% I don't know

For their part, managers of alternative funds are concerned by the uncertainties surrounding the AIFM directive and may consider packaging their strategies as UCITS: 60% of alternative investment funds (AIFs) very much agree that the AIFM directive leads to uncertainty about the distribution of funds; 65% of AIFs plan (either “somewhat” or “very much”) to restructure their funds as UCITS, whereas 25% do not.

1 - If more than one person from a single company responded to the survey, assets under management were counted only once. Respondents who did not report an affiliation account for less than € 2 trillion. Ten percent of respondents did not answer the question.

Do you envisage restructuring your own strategies under the UCITS regulation? (AIFMs)

18.2% Not at all 42.6% Somewhat 26.8% Very much so 12.4% I don't know

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An EDHEC Risk Institute Publication