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Within a decade the absolute return UCITS industry will have more than $1 trillion assets under management. But what will the sector look like in eight years? Compared to its cousins in the long-only and hedge fund worlds, the absolute return UCITS sector is still in its infancy.
But I am convinced that this is changing, and fast, so that the alternative UCITS sector will challenge and force innovation in the global asset management industry.
Investors will embrace alternative UCITS
Savers’ needs will continue to drive innovation and I believe that institutional and retail investors will embrace the onshore absolute return UCITS industry in their pursuit of returns. Responding to various regulatory changes, institutional investors who are unable to access offshore domicile strategies will have to access their hedge fund strategies via a UCITS structure. For more esoteric strategies this will happen through Qualifying or Sophisticated Investor Funds.
For the man on the man on the street, I think the days of a diversified portfolio of cash, bonds and equities are over. Retail investors and their advisers will turn to alternative investments for capital protection, for alpha, and, also diversification.
The next eight years will see an exponential growth in education on alternative strategies and their uses and I believe that the groups that will be successful in this sector are those that invest as much in this as in their products.
The National Employment Savings Trust is a pension fund being set up by the UK government and I am sure that it will not be long before it and other international government-led pension initiatives will look to alternative assets in a regulated wrapper for their investors.
Though the term ‘hedge fund’ will probably be dropped, the benefits of using absolute return or alternative strategies will soon be seen by the masses as a tool for long term personal money management.
The alternative UCITS financial services industry
Convergence between traditional and alternative assets will continue, but in the UCITS world there will be an acceleration in unions between alpha producers and for asset managers with large distribution channels.
The asset managers with the right distribution strategy will continue to thrive as the asset management sector diverges between cheaper passive and more expensive active funds.
This will see small alternative UCITS platforms close and I am certain that the popular platforms will be the ones that have more high performing external funds. Fees will be challenged as competition for assets increases especially if alpha producers offer exclusivity for their strategy.
In terms of location, London will continue to dominate, together with domiciles in Luxembourg or Ireland, a lthough I see other domiciles like Malta also attempting to emerge.
There are almost 1,000 alternative UCITS funds in the Absolute UCITS database and the strategy that dominates is equity long/short.
By 2020 a suite of all permitted investment strategies will be made available within the wrapper, they will come in a variety of share classes including renminbi to appeal to the growing hegemony of China. Liquid strategies that don’t need to be domiciled offshore will come onshore – bringing asset managers’ UCITS range under one umbrella for easier distribution.
UCITS V, once enshrined in law, I am convinced will be around in eight years time. It will resolve issues around the definition of absolute return UCITS: as complex or non-complex, as well as issues around permitted strategies. UCITS V will be about tying up various other loose ends.
UCITS in US, Asia and beyond
In 2020, European UCITS will still dominate the onshore hedge fund industry. I personally believe that Asia will be unable to create a fund passport to contest UCITS because of old rivalries between Hong Kong and Singapore.
Legislation means that countries in the region have difficulty selling funds between themselves and this crack in unity will allow the European asset management industry to continue to be the best unifying and passportable option It is unlikely that a solution will be reached by 2020 but investors in the region want to be part of this innovation in the asset management industry so I am sure that UCITS will continue to thrive in Asia.
US-based asset managers will continue to launch European-domiciled funds via the UCITS structure in an attempt to raise assets from the lucrative European market, but their success will be determined by the quality of their local distribution relationships.
US savers cannot invest into UCITS funds but they are able to access hedge fund strategies through 1940 Act mutual funds and deals such as the recent Standard Life union between John Hancock Mutual Funds will see more and more cross board co-operations.
I believe that the emerging economies, especially those with a less developed asset management industry, will turn to UCITS as well regulated and innovative investment solution for their expanding middle classes.
UCITS is one of Europe’s success stories – and if the delicate balance between innovation and protection will be struck successfully, I am certain that absolute return UCITS will become so ingrained in the investment landscape that despite the obstacles, hurdles and difficulties in the next few years, the industry will prove itself by innovating and growing.
Where do you think the industry will be in 2020? Comment on this article below.