Undertakings for Collective Investment in Transferable Securities or UCITS is an acronym nearly everyone in this industry is familiar with. This omnipresent set of directives is encouraging hedge funds to evolve, to manage risk in a more transparent manner and to change the way they have historically done business. Investor appetite for UCITS products over the past year has increased with net inflows into all UCITS products hitting €122 billion for the first nine months of 2009, and the total net assets under management of UCITS funds reaching €5.16 trillion according to a recent EFAMA report (see Fig.1). It seems like hedge fund managers, traditional asset managers, platform operators and innovative combinations of these players are launching a new UCITS fund every day. With over 500 absolute return UCITS funds now listed on the Irish Stock Exchange alone, the market is already becoming crowded, creating an interesting situation for fund managers.

Why UCITS?
Following the events of 2008, institutional and retail investors alike have become more demanding. The need for greater levels of transparency, liquidity and regulatory oversight are criteria that UCITS funds can meet. For hedge fund firms, UCITS products enable them to diversify their investor base and explore multiple distribution channels. However, to take advantage of the UCITS opportunity requires a different approach to marketing.

Until now, investors have seen traditional asset managers and hedge funds as separate asset classes, both of which have their place in a portfolio. Whether the UCITS umbrella is used to target retail or institutional investors, the convergence of hedge funds and mainstream asset managers is accelerating and inevitably competition is rising. They both promise investors absolute returns, transparency, pre-established risk and liquidity management and a sense of safety. There are, however, some differences; one group of managers has a long history of using absolute return techniques, quantitative models and some other, more exotic strategies, but little or no history of marketing, especially to a retail audience, whilst the other group is the polar opposite. The well-oiled marketing machine of traditional asset managers helps to push their UCITS funds in front of the same investors that hedge funds are targeting but they can shout louder, more consistently and have the strength of a recognised brand behind them.

On the other hand, hedge fund managers, with the more established pedigree for running absolute return strategies and arguably the potential for stronger returns, due to regulatory constraints, have been unable to develop sophisticated marketing departments and few have a brand that is recognised outside industry circles. This presents a danger that UCITS funds run by hedge fund managers may be overlooked by investors in favour of those funds run by managers who are more readily recognisable. Some traditional fund managers are already offering hedge fund-managed UCITS vehicles (Merrill Lynch, JP Morgan, Schroders) but for many of the managers launching UCITS funds, marketing will be an uphill struggle.