JOY DUNBAR, EDITOR, ABSOLUTE UCITS
Over the last few years, increasing numbers of hedge fund managers have been using the UCITS vehicle to wrap up their strategies, which have also significantly broadened and deepened.
European equity had dominated the alternative UCITS strategy universe, with 78 funds and assets under management of $17 billion, when HedgeFund Intelligence started tracking the universe in June 2010. At that time, the database had 254 funds with $46 billion of assets under management.
Two years later, fixed income as well as multi-strategy and mixed arbitrage are the dominant strategies with assets under management of $24 billion and $23 billion, respectively, at the end of June 2012. These strategies account for the three largest funds in the alternative UCITS sector by assets, namely Standard Life Investments– Global Absolute Return Strategies, M&G Optimal Income Fund and JB BF Absolute Return Bond Fund.
Although European equity is now only the third-biggest strategy with assets under management amounting to $15.5 billion at the end of June 2012, it still boasts the largest number of funds which currently stands at 91. European equity reigned supreme until June 2011, but the strategy was knocked off its perch by turbulent markets in the last quarter of 2011. This led to many investors diversifying out of equities as there was a perception that some funds were simply following the direction of equity markets.
The appetite for launching European equity funds, the oldest strategy in the alternative UCITS universe, seems to be waning and, in the first half of this year, only four were launched with a collective $69 million of assets under management.
It is unsurprising that this strategy has lost its overriding share of assets – especially during a period when directional strategies are falling out of favour because of the severe volatility in equity markets.
However, strategies with fewer assets have the most potential to grow as institutional investors diversify their strategy choices. This is highlighted by the fact that global equity, emerging market equity, fixed income and macro all raised more assets in new funds than European equity, according to our June 2012 new fund survey.
More asset managers will launch these strategies as demand from pension and institutional investors increases. As a result, there will be asset-raising opportunities for strategies such as volatility, credit, CTA, managed futures and currency funds as institutional investors feel increasingly driven by the need to divest out of cash into riskier assets.
Alternative UCITS vehicles increased to 453 funds by June 2012 from 427 funds in June 2011. Assets under management have remained essentially flat at $116 billion in June 2011 and in June 2012 – but have increased from $113 billion in December 2011 when there were 479 funds. Nevertheless, a favourable macro environment – especially if the eurozone crisis is resolved – could result in an overall expansion of assets.
FUTURE OF UCITS-COMPLIANT INVESTMENT STRATEGIES
As more and more individuals become responsible for looking after their own retirement income in markets as variable as Sweden, Chile and Peru, they will increasingly turn to UCITS-compliant vehicles to meet their income needs.
As pension contributions increase, individual investors will want to diversify risk and this change will benefit those asset managers that offer investment diversification such as multi-strategy and mixed arbitrage or multi-asset portfolios.
Providers of defined contribution pension schemes are attracted to UCITS because they are well regulated and there is a consistent framework which could pave the way for pan-European schemes.
Meanwhile, bureaucrats in the European Commission are currently discussing the – appropriateness – of UCITS-compliant funds, that employ sophisticated investment strategies, in its latest consultation of what is unofficially dubbed as UCITS VI.
Under the current rules, UCITS-compliant funds are required to invest in financial instruments to meet the liquidity requirements of the fund.
The directive also allows funds that adopt the UCITS framework to gain exposure to non-eligible assets, such as commodities, in a number of ways: financial indices using financial derivative instruments, closed-ended funds or structured transferable securities.
European regulators, meanwhile, want investors to be able to replicate the strategies of UCITS-compliant commodities and CTA funds which typically gain access to these sectors by employing financial indices. However, many managers of these financial funds do not want to disclose their methodology to investors, despite the regulatory demand for more transparency, and may decide to withdraw from offering this type of strategy within a UCITS framework.
The latest consultation document also points out that a sound financial services industry should benefit investors, as well as the economy, in the long term, and broaden the investment choice by making long-term investments available.
It has also suggested that UCITS could be used for investment strategies such as direct investments into unlisted companies, infrastructure projects, real assets, and third-party managed funds that are investing in unlisted companies, and could channel money to the European Social Entrepreneurship Funds.
As the consultation document explains: "Although long-term investing only offers returns over the long term, such investing may better contribute to the financing of new projects and expansion plans that normally require longer time horizons for completion."
The document also points out that the industry has been asked by the European Commission if UCITS rules need to be modified or whether a stand-alone initiative might be more appropriate for these kinds of investments.
The increasing strategy diversification indicates the UCITS sector is undergoing a maturing process. The recently published Absolute UCITS Awards (see winners, below) reflects how the sector is evolving.
This is highlighted by the global equity fund, DNB TMT Absolute Return, run by Oslo-based Anders Tandberg-Johansen at DNB Asset Management. The fund employs a technology, media and telecoms strategy and provides an example of the newer strategies that are offered within the UCITS wrapper.
Some continental boutiques have also been doing well, such as Munich-based Assenagon Asset Management, which has attracted over $1 billion into its UCITS-compliant credit hedge fund aimed at institutional investors. Credit has been one of the most popular asset classes in terms of attracting assets and by the number of funds launched in alternative UCITS in the past couple of years.
Old Mutual Global Equity Absolute Return was one of the best performing risk-adjusted funds during the reporting period covered by the awards, when it returned almost 13%. It massively outperformed the composite index, which was down 0.69% over the same 12 months, demonstrating that UCITS-compliant funds can deliver impressive performance.
The giant Global Absolute Return Strategies fund, managed by Standard Life Investments, won the hotly contested Fund of the Year award. The strategy is the largest in the Absolute UCITS database with assets of around $20 billion and has captured the interest of investors globally – which is not surprising, given it returned an enviable 6.81% with a Sharpe ratio of 0.97 over the 12-month reporting period that the awards were assessed.
European Equity Long/Short
Fund name: Phileas L/S Europe
Fund managers: Cyril Bertrand & Ludovic Labal
12-month return: 5.73%
Sharpe ratio: 2.64
Equity Market Neutral & Quant
Fund name: Old Mutual Global Equity Absolute Return
Fund managers: Ian Heslop, Amadeo Alentorn & Mike Servent
12-month return: 12.69%
Sharpe ratio: 2.30
Fund name: Assenagon Credit Basis II
Fund managers: Wolfgang Klopfer & Jochen Felsenheimer
12-month return: 4.12%
Sharpe ratio: 3.06
Fund name: Helium Opportunities
Fund manager: Henri Jeantet
12-month return: 3.94%
Sharpe ratio: 1.33
Fund name: DNB TMT Absolute Return
Fund manager: Anders Tandberg-Johansen
12-month return: 8.56%
Sharpe ratio: 0.98
Asian & Emerging Market Equity
Fund name: Arkos Capital World Invest Absolute Emerging
Fund managers: Enrico Camera & Iain Cartmill
12-month return: 8.63%
Sharpe ratio: 1.63
Fund name: CF Eclectica Absolute Macro
Fund manager: Hugh Hendry
12-month return: 9.92%
Sharpe ratio: 1.71
Fund name: Accura AF1
Fund managers: Michael Demmel, Rudiger Fries & Hadi Saidi
12-month return: 9.29%
Sharpe ratio: 1.29
Multi-Strategy and Mixed Arbitrage
Fund name: Wegelin Global Diversification (now 1741 Global Diversification Fund)
Fund manager: Daniel Leveau
12 month return: 9.45%
Sharpe ratio: 1.45
Fund of the Year
Fund name: Standard Life –s Global Absolute Return Strategies
Fund manager: Multi asset investment team led by Euan Munro
12-month return: 6.81%
Sharpe ratio: 0.97