By Nick Evans
Everyone is at it, it seems - even John Paulson, who was recently in London apparently to assess the feasibility of launching a UCITS version of his firm's flagship hedge fund strategy.
An ever-growing list of European-based firms have launched, or are looking at launching, UCITS funds or UCITS versions of their hedge funds - although some have concluded that it is not for them, including some of the very biggest players in Europe.
Several significant US-based managers have already launched them, with more lining up to do so. And the first funds from Asia and other parts of the world are also starting to populate the increasingly global UCITS hedge fund universe.
Hedge fund-related UCITS funds remain a very small part of the overall UCITS universe. But the growth in their adoption by both managers and investors is striking - as our first-half new fund survey this month shows - and the implications for the hedge fund industry may be profound.
Several major London-based alternative asset managers report far greater inflows in recent months into their UCITS vehicles than into their often much longer-established - and, in many cases, rather better-performing - Cayman funds.
And the current global political demonisation of offshore centres, tax-efficient structures, hedge funds and anything else that can usefully be characterised as part of the 'shadow' banking system is clearly providing a major boost to onshore fund structuring at a time when political risk is clouding almost everything to do with the financial system.
In Europe, of course, it is the uncertainty surrounding the AIFM directive that is providing the major spur - with countries like France and Germany seemingly engaged in a political crusade to drive as much of the supposedly 'unsafe' offshore fund industry into supposedly 'safe' onshore vehicles.
This looks to be a dangerous illusion. Investors will probably be no safer in an onshore than an offshore vehicle - and very possibly less so. And the UCITS framework arguably just opens up hedge fund investment to a new range of investors who do not understand hedge funds and could turn out to be inappropriate partners.
That said, UCITS may as a result be providing a very important role as the vehicle by which the hedge fund industry - which does lay itself open to perceptions of secrecy and opacity - becomes a fully mainstream part of the wider investment world. That can only be a good thing.
But there are many potential flaws. The liquidity constraint is one - and it will surely not be long before the first UCITS hedge fund runs into trouble as a result of a liquidity mismatch.
Leverage is another. Although the use of leverage in hedge funds generally is much lower now than it was before the crisis, some strategies do legitimately require lots of leverage - and the only certain result from shoehorning strategies like those into more constrained UCITS vehicles will be lower returns.
Investment restrictions can also be difficult to get around - such as the ban on direct investment in commodities. The costs to managers are not trivial - in terms of compliance, distribution commissions and a myriad other fees and expenses.
And the advantages to investors - other than being able to get in and out quickly - are not entirely obvious either. After all, liquidity and transparency are useful. But, at the end of the day, performance and investment talent are what matters.
HedgeFund Intelligence will be keeping a very close eye on what is clearly a very significant development for the alternative investment industry - and in September we will be launching a news, data and information service called Absolute UCITS, which we hope will add value and bring insight to a world that needs better understanding and analysis.
But we will be doing so with our eyes open. UCITS may be the missing link that connects sophisticated investment strategies with mainstream investors who have hitherto been unable to access them.
But it is far from clear whether UCITS does genuinely represent the future of the hedge fund industry here in Europe, or if it is simply a temporary reaction at a time of heightened political intervention in everything to do with finance.
Either way, though, it looks certain that there will be accidents ahead. And the only thing that is safe to say is that UCITS is very unlikely to be the panacea that many people are hoping, wanting and (in more than a few cases) needing it to be.