Alternative UCITS reaching important milestone

Wed Apr 25, 2012

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This year heralds the point where many single manager alternative UCITS funds will reach at least two or three year track records.
 
This is the point that many fund managers have been waiting for - as this milestone marks the point where professional investors are more likely to make a commitment.

Some funds, since the growth of the alternatives UCITS sector, have opened and closed very quickly because they failed to capture investor imagination.

A difficult 2011 dogged the whole asset management world but was particularly challenging for UCITS-compliant alternative funds because it they represent a new sector.

However, the liquidity injection from the European Central Bank's long-term refinancing operations (LTRO) has created more optimism in markets and they rallied earlier this year.

Meanwhile, the UCITS fund of funds sector remains a small though not insignificant part of the market. With around 50 funds that have attracted assets under management of more than $4.2 billion, as major investors in alternative UCITS they have been a useful indicator of what is happening in the market.

Performance

2011 was a bad year for hedging strategies, and other asset classes, with all indices down. So the sector badly needs alpha to justify its unique selling point, fees and prove that it is not merely a beta play.

Sector needs more breadth and depth in the market

European equity strategies still dominate the alternative UCITS sector by number of funds. But to create a truly diverse sector also requires more funds specialising in other strategies to be launched according to region and specialist sector.

This ought to include underrepresented strategies that can fit the wrapper such as equity event driven, macro, multi-strategy, credit and fixed income.

More UCITS-compliant funds need to be established from countries like China, Brazil and other Asian strategies. The US, which has the oldest most established and largest hedge fund sector, is also a key potential source for new funds.

Fund managers from all major regions should be encouraged to launch UCITS-compliant funds to create deeper penetration.

Distribution

The days when a fund which had good performance was able simply to rely on the investor finding them are well and truly over.

Fund managers, even those with great performance, need strong distribution capabilities or a distribution partner or both.

All asset managers need to have a clear distribution strategy - which may include buying in funds to bring assets under management above a certain level to attract larger tickets from institutional investors.

Regulatory uncertainty

This has meant that using an onshore and well regulated wrapper, like UCITS, is better in the longer term for retail clients - who may have traditionally gone offshore to avoid tax - and institutional European investors because they are required to hold less regulatory capital against a UCITS asset.

This year's milestone is an important one - and could ultimately decide the fate of the sector.

ISSN: 2151-1845 / CDC10004H