The scale of the mini-boom in Ucits hedge funds since the financial crisis is astonishing the investment industry. As the funds’ popularity surges, however, so do concerns about their prospects.
Much of the mis-selling concern has centred on the value at risk (VaR) calculations that managers can use to determine the investments of a sophisticated Ucits fund, instead of using simple limits on leverage.
Ucits funds that use the so-called “commitment approach”, on the other hand, can have a gross exposure of no more than 200%.
Day says a properly managed fund would not use a single measure of risk. “VaR is an extremely useful tool to help managers. It should not be the sole tool in managing risk,” he adds.
Despite criticism from prominent risk managers – including Nicholas Nassim Taleb – the European Union has persisted in using VaR to calculate the exposure of a sophisticated Ucits fund and has continued to allow sophisticated Ucits to persist as a retail brand.
Crain, a contributor to the PwC report, says hedge fund managers should be sure that they will be able to “honour” the liquidity promises of Ucits funds. “They should also be careful not to market any fund strategies that are not in strict compliance with the Ucits rules and their spirit,” he adds.
The European Fund and Asset Management Association has also voiced concerns and has set up a working group.
In Britain, BlackRock, GLG, Cazenove, Jupiter and GAM are among the asset managers that have launched successful Ucits hedge funds.