Research casts doubt on retail Ucits for hedge funds
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Ucits III hedge funds may not be ’fit for purpose’ for retail investors, according to leading practitioners.
Note: This article was updated on March 15.
Research by Alternative Decisions, a hedge fund consultancy firm, highlights several potential pitfalls that groups face in making sophisticated funds more available through Ucits structures.
Alternative Decisions surveyed 178 investors, fund promoters and fund managers of both hedge funds and traditional Ucits funds from across Europe. Groups that responded include GAM, HSBC, Matrix Group, Occam Asset Management and Thames River Capital.
Representatives from these groups also took part in a conference held in February, which saw them debate various aspects of the trend towards repackaging hedge funds in Ucits wrappers.
The research publication, Better Ucits Hedge Funds, highlights concerns such as disappointing performance from Ucits hedge funds, or failure to live up to the hype surrounding them. Three quarters of those surveyed said this was the greatest risk facing these funds. (article continues below)
There are also technical and distribution challenges in repackaging hedge funds as Ucits III, the research suggests, and the risk that unsuitable strategies will be ’shoehorned’ into Ucits structures.
The publication urges product developers to be honest in their assessment of the suitability of particular strategies.
Survey respondents felt that distressed debt, multi-manager fund of hedge funds, replicators and event-driven strategies were especially unsuitable for a Ucits format.
At the Alternative Decisions event, fund group representatives said moving into the Ucits space means accepting regulation risk and the possibility of a ’blow up’ within the Ucits brand. They also suggested that the risk of mis-selling products could be greater.
Meanwhile, the representatives also raised questions about whether Ucits III hedge funds are ’fit for purpose’ for retail investors. Alternative Decisions says the main problem is whether retail investors understand the inherent risk factors of these funds.
Most participants agreed that the main challenge with attracting the attention of retail investors was the responsibility to educate them.
Alternative Decisions concludes that Ucits hedge funds have strong potential, but should be seen as a complement to other funds and not a direct replacement for offshore structures.
The firm says a general feeling of optimism towards Ucits hedge funds among participants was in stark contrast to the downbeat sentiment expressed at a Ucits conference in Luxembourg the previous week.
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Since this article was published two of the groups named in the piece, Occam Asset Management and Thames River Capital, have contacted Fund Strategy. The groups say they were not among the panellists who highlighted the potential problems with converting hedge funds to Ucits III, but are in fact supporters of Ucits III hedge funds and argued against the negative points raised.
