Are Hedge-Fund UCITS the Cure-All?

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

Executive Summary

On the whole, the survey suggests that a large wave of hedge-fund UCITS is gathering momentum: 92% of respondents say they “see a trend towards packaging HF strategies as UCITS” (38% somewhat and 54% very much so). All insurance companies, subject to quantitative restrictions that limit the possibility to invest in hedge funds, see a wave of hedge-fund UCITS. The hedge fund strategies most concerned would be Equity Long/Short and the Tactical style (commodity trading advisors [CTAs], commodity pool operators [CPOs] and Global Macro). More than 65% of respondents think Equity Long/Short strategies are more likely to be structured as UCITS than any other strategy, as these strategies rely on liquid securities. More than 40% of respondents think that Tactical style strategies are most likely to be structured as UCITS, a belief that may derive from the frequent reliance of these strategies on index derivatives that are themselves eligible for UCITS. Funds of

Funds and Multi-Strategy, for their part, are more likely to be domiciled in Europe than structured as UCITS. After all, though the UCITS directive imposes constraints on funds of funds, many national regulations authorise the distribution to all investors of domestic, regulated funds of alternative funds. Relative-Value and Event-Driven strategies are the least likely to be structured as UCITS. Thirty-four percent of respondents think that Relative-Value strategies are among the most difficult to structure as UCITS. As Relative-Value strategies involve betting that pricing discrepancies between related instruments will disappear over time, they usually involve investing a large fraction of the net asset value in a single instrument, and are thus not always compatible with the UCITS directive. Forty percent of respondents think that Event-Driven strategies are the most difficult to structure as UCITS; after all, Event-Driven strategies invest in illiquid instruments and must be altered to comply with UCITS requirements.

Respondent opinions (multiple choice, all participants)

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An EDHEC Risk Institute Publication