Editor’s Letter

Issue 121

HAMLIN LOVELL

UCITS compliant hedge funds go from strength to strength in what is a European success story. Assets have surpassed $300 billion, or 10% of global hedge fund industry assets of around $3 trillion. Granted, most hedge fund assets still come from US institutions, allocating to Cayman or Delaware vehicles, but not all managers are able or willing to distribute to the US.

Some managers run UCITS parallel to ’40 Act funds in the US, but UCITS can appeal to more managers. No special structuring is needed to receive performance fees from a UCITS. And the potential to offer weekly or bi-monthly dealing in a UCITS contrasts with the strict ‘40 Act requirement for daily dealing. The UCITS risk constraints can comfortably accommodate many strategies. For instance, the diversification criteria, capping positions sizes at 10%, need not apply to many developed government bond markets, which can leave more latitude to pursue macro strategies. Customisation can also be obtained by asking managers to sub-advise managed accounts under the umbrella of a UCITS fund.

The advent of UCITS IV – introducing greater flexibility – in 2011, spawned the growth of so-called “Newcits” but some hedge fund strategies have been structured under UCITS III for at least 20 years. A significant number of managers now launching UCITS have been around for 30 years or more. Though rising barriers to entry have arrested some launches, our 2017 UCITS Hedge Award winners range in size from around $10 million to several billions. The smallest funds tend to be part of larger groups, however. Some funds outsource to a range of service providers, including some very visible platforms – such as Lyxor, MontLake or Deutsche, and some virtually invisible platforms in the form of white label infrastructure providers that maintain a lower profile.

Absent restrictions on skilled immigrants, Brexit should not, in our view, diminish the UK’s importance in hedge fund management, including UCITS. Most UCITS funds are already domiciled in EU gateway hubs, like Luxembourg, Ireland or Malta, with fund management taking place in different locations, inside and outside the EU. UCITS are also distributed outside the EU, in Asian territories including Hong Kong, Taiwan and Singapore, and in South American countries including Chile and Peru.

Though UCITS are potentially investible by retail clients, managers and/or some regulators can restrict them to, variously defined, institutional/accredited/sophisticated/qualified clients. Minimum investment amounts, which we have seen set between EUR 1,000 and EUR 2 million, are one way in which access is controlled.

Some UCITS do have higher cost ratios than “sibling” or similar offshore funds. At the same time we are seeing products with fixed ongoing charges (including management fees and non-fee costs) capped at 1.5% or less – and sometimes even lower for the first $50 or $100 million or so raised in “early bird” share classes.