Even though we are still a long way off from the 9000 hedge funds and funds of hedge funds, there has been an unprecedented boom in the launch of UCITS-compliant hedge funds, or so called Newcits, over the past eighteen months. This trend is likely to continue, since this format addresses the demands for transparency, liquidity, regulation and diversification of investors, institutional investors in particular.
Although the UCITS framework offers easy access to an alternative world of investment, it does not allow all strategies to be applied. In addition to limiting the degree of leverage, current European regulations disallow, for instance, commodity futures and gates, and require funds to maintain a minimum fortnightly level of liquidity.
Fabrice Seiman, co-president of Lutetia Capital, says the “success of Newcits will depend on their performance.”
That is why strategies such as long-short equity or quantitative funds make up the bulk of available funds, thanks to the eligibility and liquidity of their assets. Conversely, non-liquid strategies or highly concentrated strategies such as distressed debt or certain credit strategies are excluded from this paradigm.
As with any product, the success of Newcits will depend on their performance and their risk/returns ratio. In the longer term, the market may well split into two, depending on investor profiles, with offshore hedge funds and funds of hedge funds that are less transparent and liquid and more concentrated and potentially risky on the one hand, and on the other a more liquid offer offering represented by UCITS III funds, which are expected to grow rapidly.