Long/short equity has been the most commonly sought hedge fund strategy amongst institutional investors in 2013, with approximately 43% of all mandates issued this year including the strategy. As long/short equity is typically a liquid strategy that works well with low leverage, it can fit well into the UCITS framework, providing an alternative to investors investing in traditional long/short hedge funds. UCITS funds remain a niche component of the hedge fund industry but this regulated structure accounted for 14% of all hedge fund mandates in Q1 2013. This is double the 7% of searches which included UCITS hedge funds in 2012, suggesting that the structure is gaining momentum amongst institutional investors.
One common reason for investors avoiding UCITS-compliant hedge funds previously has been the dampened returns when compared the overall hedge fund universe. However, the latest data from Preqin’s performance benchmarks as of 30 April 2013, shows that long/short UCITS funds have outperformed traditional long/short hedge funds so far in 2013, with cumulative returns of +4.91% compared to +4.65%. The overall UCITS index still trails the overall hedge fund index by 0.9% for the year to date, but the performance of UCITS long/short funds so far in 2013 is likely to provide encouragement to investors.
Long/short equity remains the most common strategy targeted by UCITS hedge fund investors over the coming 12 months, with 50% of all current mandates among UCITS investors including a long/short equity component. Long/short credit is also prominent in investor mandates, with 19% of UCITS hedge fund investors currently seeking exposure to this strategy. Spanish firm, Valira Capital Asset Management, is one firm focusing on long/short UCITS funds over the coming 12 months, with both long/short equity and long/short credit strategies being targeted.
Investors have shown increasing preference for alternative UCITS funds in recent years and long/short is the dominant strategy in the alternative UCITS universe, representing approximately 50% of all UCITS-compliant hedge funds on Preqin’s Hedge Fund Analyst database. Performance of long/short UCITS funds has been encouraging in 2013, although funds will need to maintain this over the longer term to convince all investors of the benefit of the structure over traditional hedge funds. The structure is anticipated to grow further over the coming years as investors continue to look for liquid alternatives in their hedge fund portfolios, as well as funds that comply with regulations.