According to Preqin’s Hedge Fund Investor Profiles online database, approximately 338 institutional investors tracked by Preqin utilize UCITS-compliant hedge funds or alternative mutual funds within their portfolios. Such structures can offer hedge fund-like strategies through more regulated and transparent vehicles with other benefits such as greater liquidity and lower fees. This would no doubt appeal to investors attracted to such benefits while gaining exposure to complex and sophisticated hedge fund strategies. Using data from Preqin’s Hedge Fund Investor Profiles database, we take a look at investors with an appetite for liquid alternatives, such as alternative mutual funds and UCITS-compliant hedge funds.
Preqin data shows that approximately 86% of all investors investing in UCITS-compliant hedge funds are based in Europe, while approximately 88% of investors investing in alternative mutual funds are based in North America. Alternative mutual funds are regulated by the U.S. Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (‘40 Act’), while UCITS funds are regulated by the European Union under the Directive 2014/91/EU. It could be argued that there is a correlation between regulatory agencies and investor headquarters.
The chart below depicts the proportion of investors that invest in alternative mutual funds and UCITS-compliant hedge funds by type of investor. Fund of hedge funds managers make up the largest proportion of firms that invest in both UCITS and alternative mutual funds (49% and 62% respectively), which suggests that there appears to be a very healthy appetite for these liquid alternative fund structures among multi-managers generally. Twelve percent of investors in UCITS-compliant hedge funds are asset managers, while only 2% of investors with allocations in alternative mutual funds are of this investor type, indicating that asset managers may not have the same appetite for US-regulated ‘40 Act’ funds as they do for UCITS. Indeed, 93% of asset managers worldwide investing in UCITS hedge funds are based in Europe, according to Preqin data. The opposite can be said for foundations investing in alternative mutual funds, of which all that are tracked by Preqin are based in North America. The chart shows that foundations make up 14% of investors in alternative mutual funds, but constitute only 1% of investors in UCITS-compliant funds.
The prevailing concern surrounding liquidity and fees of traditional hedge fund structures may encourage more investors to consider alternative routes into hedge funds. However, regulatory burdens associated with alternative mutual funds and UCITS-compliant hedge funds could limit fund managers from fully implementing their respective strategies if they are deemed too complex or too risky for retail investors. These trends infer that commitments to the liquid alternatives space are diverse among different investor types. Current hedge fund managers will find launching more liquid versions of their funds beneficial: it may help to attract investor capital and to compete with the rising prominence of these new fund structures.