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Comment by Joy Dunbar, Editor of Absolute UCITS
The development of ‘absolute return’ funds has sparked much speculation about whether hedge fund strategies within a regulated onshore wrapper will start to erode the traditional offshore hedge fund industry.
Alternative UCITS funds have seemed to offer broad appeal across the investing spectrum – both to institutional investors that cannot invest in offshore vehicles and also to retail investors looking for alpha and capital protection in a period of super-low interest rates, minimal bond yields and deeply uncertain equity markets.
Hedge fund managers have managed to stave off the competition from absolute return UCITS funds by either launching strategies of their own within the onshore wrapper or by continuing to appeal to their core investor base.
But perhaps the greater threat of absolute returns funds is to long-only managers, not to hedge funds. Plain vanilla, index-benchmarked long-only equity strategies have dominated the asset management and mutual funds space for decades – accounting for the vast majority of retail and institutional equity portfolios.
Volatile markets over the past decade or more have resulted in investors asking themselves: what is the point of investing in a fund that beats a benchmark by 5% if the fund is down 30%? The fund may have fulfilled its relative return objective, but the investor has still lost a significant chunk of money.
Traditional long-only products are being challenged during another volatile period in equity markets – on the one hand by active absolute return fund managers within the UCITS sphere that charge 2/20, and on the other by ETFs that provide the beta return of markets at a fraction of the costs. US-based fund managers are also diversifying into onshore absolute return funds, but using their own regulated structures.
Some of the largest funds in the Absolute UCITS database, by assets under management, are from huge traditional investment houses that have recognised the needs of retail investors in their quest for alpha.
I am sure in the next few years there will be many more mergers and deals between proven alpha producers and firms with massive distribution capabilities – such as the merger between F&C and Thames River, or by Aspect Capital being used as a sub-adviser on a Skandia Investment Group fund.
The days of long-only dominated investments may be coming to a close. But hedge fund managers and traditional asset managers will need to rise to the challenge to meet the needs of investors.