Harnessing the Potential of UCITS Hedge Funds
Why are so many hedge funds interested in UCITS?
Download full conference report here
Interest in launching hedge funds in a UCITS wrapper is running at an all time high, and was particularly evident at the UCITS Hedge event, “Harnessing the Potential of UCITS Hedge Funds”, which was held at Kings Place, the Guardian newspaper’s building in London, on 29th June. The timing seemed right to offer readers of The Hedge Fund Journal and UCITS Hedge a selection of some of the leading service providers and fund managers in the field, who were kind enough to offer their views on the quickly developing UCITS market.
This special report contains highlights of that event, and where possible edited transcripts of the speeches. It also includes an extended Q&A with Paul Graham, the Head of Alternatives at Gartmore, including answers to questions that were not put to him on the day.
Launching a UCITS fund requires plenty of experience on hand and no shortage of resources, as the service providers who presented were able to point out. Deutsche Bank’s Alex McKenna put the case for the platform route, while Olivier Laurent, Director of Alternative Investment Product Management at RBC Dexia explained some of the operational risks and challenges that fund managers considering a UCITS launch ought to be aware of.
Also speaking were Doug Shaw, a managing director at BlackRock, and Vis Nayar, Senior Fund Manager at HSBC. Both hail from substantial fund management operations with considerable institutional and retail client bases. Both focused in particular on the characteristics of UCITS funds in their respective stables, highlighting that liquidity and frequent dealing are enabling them to reach a retail client base, in Shaw’s and Paul Graham’s words ‘deep retail’ – private individuals, stockbrokers, financial advisers – who have not previously been the traditional target market for European hedge funds.
The ‘retailisation’ of the hedge fund industry was an oft-debated theoretical issue in the heady days before the credit crunch, but the success story of BlackRock’s UK Absolute Alpha Fund, which now has over £2 billion in assets under management, demonstrates that retail is here to stay, and it is working very well for some hedge fund groups. Indeed, the BlackRock fund is so retail it has been advertised on billboards in the UK and is overseen by BlackRock’s mutual funds division, not its hedge fund division.
As Shaw pointed out, the focus for the fund, from the beginning, has been solidly retail, and private investors and their advisors comprise 55% of the investor base. This was not something the firm stumbled into. The fund moved to daily dealing because of demands from retail clients for this facility, and similar demands led to the introduction of a LIBOR hurdle rate. So successful has this fund been that BlackRock is now looking at launching UCITS versions of some of its other hedge funds. Given its £21 billion book of single strategy hedge funds, it has a good selection of equity strategies to pick from, including some gems that have demonstrated solid track records through 2008-09.
The conference was also an opportunity to highlight the UCITS Hedge database, our proprietary database of UCITS compliant hedge funds. The database is unique in that it uses tough screening criteria to ensure the funds contained therein are proper hedge funds, not absolute return or 130/30 funds masquerading as hedge funds. The database and its related performance indices continue to grow rapidly as more funds come onto the market. If the level of interest exhibited in this event was anything to go by, we can expect a fair few additions to this universe in coming months.
The UCITS Hedge database requires funds to have €10 million under management and to meet two out of three key criteria, namely a performance fee, a high water mark, and to have no benchmark other than a money market rate. In addition, for inclusion as a component of one of the strategy indexes, the candidate fund will also require a six month track record.
UCITS hedge funds: challenges and opportunities
It is possible to summarise here some of the issues that the speakers tackled. More detail can be found in the individual presentations and transcripts that follow. The abiding message was that a UCITS fund launch is not an afterthought: it is a serious undertaking requiring considerable resources and a substantial re-think of the way a fund is managed and serviced.
Luckily, the service providers, the administrators, lawyers, and prime brokers are on hand to help. They already service a considerable universe of UCITS absolute return funds, alongside their existing work in the hedge fund sector, and are already merging these expertise sets to come up with an offering that should amply serve the bulk of launches, both new strategies and those porting over from a traditional Cayman Islands structure.
Of particular interest are the varying estimates of just how many hedge funds can be replicated under the terms of the UCITS III directive. Given the OTC swap structures being highlighted, it seems as if close to 90% could be replicable. Ravi Chari, a portfolio manager with IKOS, was able to outline how a liquid FX strategy was ideally suited to a UCITS wrapper. Liquidity and an over reliance on commodity-based strategies are two of the key stumbling blocks for many managers, but even here funds are demonstrating an ability to be flexible in order to comply. As Dr Sushil Wadhwani mentioned in his presentation, there is no reason why a UCITS product does not have to be a distinct strategy in its own right, perhaps inspired by an earlier approach, but at the same time bringing some of its own original merits to the table.
There are, of course, the doomsayers, some of them in the regulatory community, who see the inherent complexity required to bring the more esoteric strategies into the UCITS wrapper as a distinct threat to ‘brand’ UCITS. Too many things can go wrong, they argue. It will all end horribly. RBC Dexia’s Olivier Laurent highlighted some of the critical areas, like counterparty risk, accurate P&L ledgers, and proper reconciliation of pricing data, that could turn out to be the weak points for funds that don’t do their homework.
Another issue highlighted by Deutsche Bank’s Alex McKenna and Simmons & Simmons’ Neil Simmonds was the choice of platform versus stand alone launch. This is one facing many managers at the moment, and speaking to fund manager delegates at the coffee break, it was obvious they had gleaned much food for thought from both presentations. The advantages of the platform approach are obvious, with the additional legal and infrastructure support, the advice on how to model the portfolio to comply with the directive, and the potential for distribution to large European investors being just some of the benefits. But, as Neil Simmonds pointed out, weighed against this there is the freedom and independence of doing it yourself, reducing the potential additional costs and not being contractually obliged to a middle man.
Finally, throughout the morning speakers touched on the issue of cannibalisation – the fear that a UCITS launch, with favourable terms, particularly dealing, would cause investors in a Cayman fund to defect. Speakers saw very different ways of coping with this, from offering distinct differences in the onshore vehicle – arguing that it is, to all intents and purposes, a different strategy – to refusing to allow offshore clients to invest in the onshore variant!
We hope you enjoy and find informative the following series of articles, and look forward to seeing you at another of our events in the near future.
Interest in launching hedge funds in a UCITS wrapper is running at an all time high, and was particularly evident at the UCITS Hedge event, “Harnessing the Potential of UCITS Hedge Funds”, which was held at Kings Place, the Guardian newspaper’s building in London, on 29th June. The timing seemed right to offer readers of The Hedge Fund Journal and UCITS Hedge a selection of some of the leading service providers and fund managers in the field, who were kind enough to offer their views on the quickly developing UCITS market.
This special report contains highlights of that event, and where possible edited transcripts of the speeches. It also includes an extended Q&A with Paul Graham, the Head of Alternatives at Gartmore, including answers to questions that were not put to him on the day.
Launching a UCITS fund requires plenty of experience on hand and no shortage of resources, as the service providers who presented were able to point out. Deutsche Bank’s Alex McKenna put the case for the platform route, while Olivier Laurent, Director of Alternative Investment Product Management at RBC Dexia explained some of the operational risks and challenges that fund managers considering a UCITS launch ought to be aware of.
Also speaking were Doug Shaw, a managing director at BlackRock, and Vis Nayar, Senior Fund Manager at HSBC. Both hail from substantial fund management operations with considerable institutional and retail client bases. Both focused in particular on the characteristics of UCITS funds in their respective stables, highlighting that liquidity and frequent dealing are enabling them to reach a retail client base, in Shaw’s and Paul Graham’s words ‘deep retail’ – private individuals, stockbrokers, financial advisers – who have not previously been the traditional target market for European hedge funds.
The ‘retailisation’ of the hedge fund industry was an oft-debated theoretical issue in the heady days before the credit crunch, but the success story of BlackRock’s UK Absolute Alpha Fund, which now has over £2 billion in assets under management, demonstrates that retail is here to stay, and it is working very well for some hedge fund groups. Indeed, the BlackRock fund is so retail it has been advertised on billboards in the UK and is overseen by BlackRock’s mutual funds division, not its hedge fund division.
As Shaw pointed out, the focus for the fund, from the beginning, has been solidly retail, and private investors and their advisors comprise 55% of the investor base. This was not something the firm stumbled into. The fund moved to daily dealing because of demands from retail clients for this facility, and similar demands led to the introduction of a LIBOR hurdle rate. So successful has this fund been that BlackRock is now looking at launching UCITS versions of some of its other hedge funds. Given its £21 billion book of single strategy hedge funds, it has a good selection of equity strategies to pick from, including some gems that have demonstrated solid track records through 2008-09.
The conference was also an opportunity to highlight the UCITS Hedge database, our proprietary database of UCITS compliant hedge funds. The database is unique in that it uses tough screening criteria to ensure the funds contained therein are proper hedge funds, not absolute return or 130/30 funds masquerading as hedge funds. The database and its related performance indices continue to grow rapidly as more funds come onto the market. If the level of interest exhibited in this event was anything to go by, we can expect a fair few additions to this universe in coming months.
The UCITS Hedge database requires funds to have €10 million under management and to meet two out of three key criteria, namely a performance fee, a high water mark, and to have no benchmark other than a money market rate. In addition, for inclusion as a component of one of the strategy indexes, the candidate fund will also require a six month track record.
UCITS hedge funds: challenges and opportunities
It is possible to summarise here some of the issues that the speakers tackled. More detail can be found in the individual presentations and transcripts that follow. The abiding message was that a UCITS fund launch is not an afterthought: it is a serious undertaking requiring considerable resources and a substantial re-think of the way a fund is managed and serviced.
Luckily, the service providers, the administrators, lawyers, and prime brokers are on hand to help. They already service a considerable universe of UCITS absolute return funds, alongside their existing work in the hedge fund sector, and are already merging these expertise sets to come up with an offering that should amply serve the bulk of launches, both new strategies and those porting over from a traditional Cayman Islands structure.
Of particular interest are the varying estimates of just how many hedge funds can be replicated under the terms of the UCITS III directive. Given the OTC swap structures being highlighted, it seems as if close to 90% could be replicable. Ravi Chari, a portfolio manager with IKOS, was able to outline how a liquid FX strategy was ideally suited to a UCITS wrapper. Liquidity and an over reliance on commodity-based strategies are two of the key stumbling blocks for many managers, but even here funds are demonstrating an ability to be flexible in order to comply. As Dr Sushil Wadhwani mentioned in his presentation, there is no reason why a UCITS product does not have to be a distinct strategy in its own right, perhaps inspired by an earlier approach, but at the same time bringing some of its own original merits to the table.
There are, of course, the doomsayers, some of them in the regulatory community, who see the inherent complexity required to bring the more esoteric strategies into the UCITS wrapper as a distinct threat to ‘brand’ UCITS. Too many things can go wrong, they argue. It will all end horribly. RBC Dexia’s Olivier Laurent highlighted some of the critical areas, like counterparty risk, accurate P&L ledgers, and proper reconciliation of pricing data, that could turn out to be the weak points for funds that don’t do their homework.
Another issue highlighted by Deutsche Bank’s Alex McKenna and Simmons & Simmons’ Neil Simmonds was the choice of platform versus stand alone launch. This is one facing many managers at the moment, and speaking to fund manager delegates at the coffee break, it was obvious they had gleaned much food for thought from both presentations. The advantages of the platform approach are obvious, with the additional legal and infrastructure support, the advice on how to model the portfolio to comply with the directive, and the potential for distribution to large European investors being just some of the benefits. But, as Neil Simmonds pointed out, weighed against this there is the freedom and independence of doing it yourself, reducing the potential additional costs and not being contractually obliged to a middle man.
Finally, throughout the morning speakers touched on the issue of cannibalisation – the fear that a UCITS launch, with favourable terms, particularly dealing, would cause investors in a Cayman fund to defect. Speakers saw very different ways of coping with this, from offering distinct differences in the onshore vehicle – arguing that it is, to all intents and purposes, a different strategy – to refusing to allow offshore clients to invest in the onshore variant!
We hope you enjoy and find informative the following series of articles, and look forward to seeing you at another of our events in the near future.
