Hedge fund managers have not exactly covered themselves in glory over the last few years. The Madoff scandal, poor investment returns, particularly in 2008, illiquid funds which gate investors' redemption requests, opaque reporting, inappropriate investments, excessive and asymmetric performance fees have all tested even the most loyal advocate of hedge funds.
But the truth remains that investors are once again committing capital to hedge funds because they hold out the prospect of producing positive returns with lower risk than investing in conventional equity markets. In an era of heightened uncertainty and low interest rates, this promise is highly attractive. The growth of Newcits is, in theory, a good thing for the investment community because it widens the investment choice available to most investors. In reality, it will only be a success if the hedgies learn from the errors of their recent past.
| Magnus Spence from Dalton Strategic Partnership says that the growth of Newcits is "a good thing."|
UCITS is a powerful brand which is recognised not only in Europe but also across Asia and the Middle East. It has been painstakingly nurtured by regulators as an imprimatur for reliability and integrity over many years. Hedgies need to respect this brand and make sure that they do not bring it into disrepute.
This means they need to learn from the lessons of the recent past. They need to provide transparent reporting on their portfolios; to avoid creating illiquid portfolios which cannot be realised to meet investor redemption requests; to ensure that risk levels are appropriate to deliver positive returns in spite of difficult market conditions; and to design fee structures which are fair and balanced. If we can do these things, we will be able to make a valuable contribution to the range of investment solutions for investors. If we fail, we are unlikely to be forgiven so easily for our failings.