Jubilation subsides, but alternative UCITS here to stay

Wed Feb 29, 2012

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Comment by Joy Dunbar, Editor of Absolute UCITS


The number of new hedging strategies using the UCITS wrapper has declined by 36%, according to the Absolute UCITS global new fund survey ( see article here). But does this mean that the alternative UCITS sector is in decline?

The jubilation surrounding hedge funds managers using the UCITS wrapper has definitely slowed. But like any rapid moving sector there is always a period of contemplation and review. I think that we are currently going through a reflective period and there are a number of reasons for this – barriers to entry are a lot higher because of increased regulatory pressures, volatile markets and an unstable economic environment.

However, the environment for alternative UCITS remains strong. The UCITS Directive is the only recognised global financial regulatory framework that works to a consistent set of standards. Other major regions where asset management firms are based have not been able to compete because in the US the industry tends to be inward-looking and in Asia there is less incentive to have an economic union similar to that in Europe.

For this reason the UCITS Directive works for global asset managers and it is easier to attract worldwide investors (except US-based ones). The framework has created a brand that has proved itself for its transparent nature, good governance and its liquidity.

An increasing number of retail and institutional savers are using the wrapper. Indeed the EC wants UCITS funds to be the investment building block for a harmonised European-wide pension scheme, called the Officially Certified European Retirement Plan, which is currently being developed by officials in Brussels. 

But there is a cloud over the horizon for UCITS which needs to be ironed out. Any potential issues regarding the use of indices, credit default swaps, total return swaps and other derivatives within the wrapper may not come to light until there is a liquidity mis-match event within a fund.

How the sector could or would respond to such an event is unknown until it actually occurs, and complex UCITS are not a priority for the EU as the focus is still on Greece and the euro crisis.

National governments won’t be able to change the UCITS directive if there is a crisis – which might not make a resolution easier. But one thing seems certain to me: one way or another, alternative UCITS funds are here to stay – and will survive a crisis.

ISSN: 2151-1845 / CDC10004H