The Alternative Investment Fund Managers Directive (AIFMD) was published in the Official Journal of the European Union in July 2011 with the aim of implementing harmonized regulatory standards across all alternative investment managers. Since 2011, the total number of new hedge funds offered through the Undertakings for the Collective Investment of Transferable Securities (UCITS) structure has fallen each year. Using data on 931 UCITS hedge funds tracked on Preqin’s Hedge Fund Analyst online database, this blog investigates this trend and the possible impact that scheduled developments in both UCITS and AIFMD legislation could have over the coming years in EEA and non-EEA regions.
Increased investor demand for liquid and transparent fund vehicles in the aftermath of the financial crisis and the Madoff scandal contributed to a sharp increase in the number of Europe-based fund managers offering UCITS-compliant hedge fund vehicles from 2009 to 2011, as shown in the chart above. However, these figures have steadily decreased in recent years, from 120 new launches in 2010 to 54 in 2014. For non-EEA-based fund managers concerned about the continued ambiguities surrounding the implementation of AIFMD regulations in EEA countries, the UCITS structure has offered a more established and clearly defined alternative. Existing UCITS platforms operating sub-funds for a number of managers can also provide a relatively straightforward method for non-Europe-based fund managers to market an existing strategy to Europe-based investors.
UCITS fund launches by non-EEA-based fund managers remained at a relatively stable level from 2010 to 2014, representing between 30 and 39 launches each year. In 2014, UCITS fund launches by non-EEA-based fund managers represented 37% of all UCITS fund launches that year, an increase from 24% in 2010. As UCITS V seeks to introduce requirements similar to the AIFMD, such as the safekeeping of assets and employee compensation by March 2016 and the introduction of a European passport by 2018, concerns about marketing to Europe-based investors may reduce over the longer term; furthermore, UCITS launches from non-EEA countries may fall in line with their European counterparts.
With UCITS hedge funds subject to heavier regulation than their traditional counterparts, Preqin’s All-Strategies UCITS Hedge Fund benchmark has underperformed the Preqin All-Strategies Hedge Fund benchmark each year since 2008. However, the recent strong performance of UCITS funds in Q1 2015 (up 3.28% for the quarter compared with 2.88% for all hedge funds for the same period) demonstrates their ability to deliver modest gains. As fewer UCITS funds are launched each year, it is possible that the fund managers continuing to offer UCITS funds will be those whose strategies are least affected by the imposed requirements of the structure; perhaps we can expect UCITS fund performance to trend ever closer to the overall Preqin Hedge Fund benchmark in future. Over the longer term, increased liquidity, improved transparency and enhanced regulation will mean that hedge funds offered through the UCITS structure will remain attractive to investors.