UCITS-compliant hedge funds continue to be a prominent choice for Europe-based investors despite the dominance of traditional fund structures. UCITS-structured hedge funds have become widespread across Europe, offering increased transparency and disclosure of investments, along with limited leverage and attractive liquidity. As a result, 26% of all active Europe-based hedge fund investors tracked by Preqin’s Hedge Fund Investor Profiles have demonstrated an appetite for investing in UCITS funds.
A study undertaken by Preqin in 2012 highlighted that around 30% of European investors had an allocation to UCITS-compliant hedge funds. Although the proportion of investors targeting the fund structure has since seen a slight decline, the UCITS sector within the European hedge fund industry still represents a significant proportion of European portfolios. Due to the higher demand for liquidity and regulation among European banks, it is no surprise that 58% of all Europe-based banks that invest in hedge funds have an allocation to UCITS-compliant funds. For the same reason UCITS-compliant hedge funds are also targeted by fund of hedge funds managers and asset managers with the proportion of these investors targeting UCITS-compliant funds increasing since 2012 to 47% and 41% respectively.
In terms of investor location, UK-based investors represent the highest proportion of European investors in UCITS, accounting for 34% of investors with an allocation to UCITS-compliant hedge funds. Investors in Switzerland represent the second highest proportion (24%) followed by France (10%). Interestingly, of all investors in France that include a current allocation to hedge funds, 71% will invest in UCITS-compliant hedge funds.
It seems apparent that there is genuine appetite for UCITS-compliant hedge funds, especially for certain types of investors that benefit from the increased transparency and disclosure of investments. One firm actively investing in UCITS-compliant hedge funds is Hilltop Fund Management. The UK-based fund of hedge funds manager recently announced plans to launch a fund of UCITS funds investing in separately managed accounts which is aimed at retail investors.
Since its inception in 2003, the structure of UCITS has been continually evolving and becoming more diverse. The European Parliament and Council have recently reached an agreement on some outstanding issues in relation to the draft UCITS V directive. UCITS V is not expected to have a huge impact on the type of funds that managers are able to implement within the UCITS structure, and should provide investors with additional protection by being aligned with AIFMD. UCITS structures will continue to be targeted by European investors, with 27% of those Europe-based investors which are seeking new hedge fund investments over the coming 12 months targeting new investments in UCITS-compliant structures.