Is the UCITS Structure Still an Attractive Alternative for Hedge Funds? – June 2014

by Samuel McKenzie

  • 04 Jun 2014
  • HF

UCITS funds grew in prominence during and shortly after the financial crisis as investors became eager to allocate capital to more regulated and transparent vehicles. From 2008 to 2009, UCITS hedge fund launches almost tripled from 34 to 91, and in 2010 121 new funds were launched. Since then launch activity has fallen significantly, with 68 and 67 funds launching in 2012 and 2013 respectively. The AIFMD regulation has surely contributed somewhat to this slowdown in launches and with the increased regulatory presence soon to be brought about by the directive, the question of whether UCITS funds will have a place in a post-AIFMD industry is surely worth pondering. 

Preqin’s Hedge Fund Analyst tracks 690 UCITS-compliant hedge funds, which manage approximately $155bn in total assets. Of the UCITS funds tracked by Preqin, 250 are managed by firms headquartered in the UK, 86 are managed by France-based managers and 67 are managed by firms based in Switzerland. Other countries such as the US, Luxembourg and Germany also house UCITS fund managers. With respect to the domiciles, Luxembourg is by far the most utilized, with 340 funds being registered there, followed by Ireland with 168 funds. 

Long/short strategies are the most prominent among UCITS funds, with approximately 46% of funds using some form of long/short approach. Macro strategies are also heavily utilized, with 27% of funds using a macro strategy. However, event driven strategies are less common in UCITS format, with these strategies making up just 3% of funds. This under-representation of event driven strategies is due to their long-term nature, which goes against the high level of liquidity that UCITS products provide. Unfortunately, this extra liquidity, combined with lower levels of leverage and constraints on available methods of investment, has an effect on performance. UCITS funds have a five-year annualized return of 5.62%, compared to the hedge fund benchmark of 11.78%, highlighting the fact that UCITS products have consistently underperformed the hedge fund benchmark. One thing to note, however, is that UCITS funds have shown lower levels of volatility than hedge funds, with five-year volatility of 4.81% compared to 5.92%. 

Unsurprisingly, UCITS funds offer lower fees, on average, than traditional hedge funds. The average management fee charged by UCITS funds is 1.40%, compared to all single manager hedge funds, which charge an average of 1.54%. At 15.92%, UCITS performance fees are also lower on average than the 18.95% charged by all single manager hedge funds. Relatively low fees, greater liquidity and less volatile returns are clearly significant incentives for investors and according to Preqin’s Hedge Fund Investor Profiles, there are 234 investors with a current preference for investing in UCITS hedge funds. Over half of these investors are fund of hedge funds managers and, unsurprisingly, the vast majority (87%) of these investors are based in Europe. 

UCITS funds clearly offer some advantages over the standard hedge fund model in terms of lower fees and increased liquidity and transparency. However, these advantages often come at the cost of lower returns. Nevertheless, investors are still keen to allocate capital to these products; however, the number of UCITS hedge fund launches has dropped substantially over the last few years. The data shows that currently UCITS funds are very much European products for European investors. With the AIFMD due to come into effect across Europe on 22nd July 2014, the issue is whether these advantages will continue to make UCITS funds attractive enough to European investors or will they choose to reallocate to AIFMD compliant vehicles.

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