Will UCITS hedge funds become a trillion dollar industry?

Mon Jan 31, 2011

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COMMENT by Joy Dunbar, Editor of Absolute UCITS


When I read in a recent report the UCITS hedge fund industry could grow to be a $1.5 trillion or €1.2 trillion industry by 2020 I was very surprised.

The figure is only slightly less than the current assets of the global hedge fund industry which stands at $1.87 trillion.

According to a report commissioned by the Association of the Luxembourg Fund Industry, published in November 2010 ( read here), ALFI expects the alternative UCITS industry to experience phenomenal growth in the next few years.

It points to several reasons why this could be the case: If alternative UCITS funds are on track to finish 2010 with $43.7 billion (€33 billion) of net new flows; and if its share of new assets rises to 25% by the end of the next decade; and UCITS flows increase by just 5% per year then alternative UCITS would gain more than $793.7 billion (€600 billion) of cumulative net new flows in the coming decade. 

And if average annual returns of 7% can be achieved in combination with these flows, total assets in alternative UCITS could therefore grow to €1.2 trillion by 2020. 

The Absolute UCITS database currently has more than 600 funds and at 30 June 2010 already had assets under management of $46.1 billion. This figure is expected to be higher when the final numbers for end-2010 are confirmed, though a rough estimate is that AUM stands at $60 billion. (Absolute UCITS publishes its official assets under management for the sector next month.)

When I quote the $1.5 trillion figure to some experts they say to me that the prediction sounds outrageously optimistic. However there are several key drivers attracting flows.

  • Traditional long-only managers margins are under threat because of cheaper ETFs and they need to produce alpha and UCITS hedge are an excellent alternative.
  • Increasing demand from investors in Europe, Latin America, Asia and other parts of the world.
  • Many fund managers like the diversified client base that UCITS can potentially attract.
  • Solvency II means that insurance companies have to change their regulatory capital requirements and may allocate to alternative UCITS funds, because they are transparent and regulated, rather than hedge funds.
  • Changing regulation of is changing industry dynamics like investment banks spinning off their prop trading desks to become stand alone hedge fund companies some of which could launch new UCITS funds.

The UCITS hedge fund industry is still in its infancy and most funds do not have the three-year track record to be considered by some influential investors. Most funds have not achieved the 7% annual returns to enable the industry to become a $1.5 trillion industry.

I think that it is too early to predict the assets under management of the industry by 2020 as this will be driven by ultimately by performance and where investors put their money.

However, the global financial crisis means that the investors value liquidity, transparency, and products backed by strong regulation and governance which means that UCITS funds will flourish though maybe not a trillion dollar industry.

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ISSN: 2151-1845 / CDC10004H