Over recent years, asset managers have gravitated towards liquid alternatives as a way to offer their clients a non-traditional investment vehicle matching high liquidity needs. Preqin’s Hedge Fund Investor Profiles track 205 asset managers considering or currently investing in hedge funds. It reveals that 21% of asset managers with hedge fund allocations utilize UCITS funds within their hedge fund portfolios, compared to approximately 6% of the wider hedge fund investor universe. With a greater degree of client focus within their asset allocations, asset managers appear to have a greater appetite for this liquid, regulated investment vehicle. Here, we look at the demand and challenges for alternative UCITS funds and examine how these vehicles can be appealing for asset managers in particular.
Nearly half (49%) of investors surveyed in Preqin Investor Outlook: Alternative Assets H2 2014 stated that they do not plan, and have no plans, to allocate to liquid alternatives. This could suggest that there is no clear, definitive sentiment felt by investors about these particular investments. However, for those surveyed with an inclination towards liquid alternatives, the top three reasons for investing in liquid alternatives were stated as higher liquidity, increased transparency and enhanced regulation. For asset managers looking for allocations on behalf of their clients, such reasons would be particularly appealing. Retail clients, for example, would require a greater level of protection and the ability to withdraw capital quickly should they need it. Regulatory and transparency measures ensure that there are procedures in place to safeguard client assets, which help maintain a level of investor confidence.
Another benefit for asset managers, and indeed investors in general, are the reduced costs of investing in liquid alternatives, of which 19% of investors in the survey cited. According to Preqin’s Hedge Fund Analyst, alternative UCITS single-manager funds charge an average management fee of 1.41%, compared to 1.53% for all single-manager non-UCITS hedge funds. Additionally, the average performance fee charged by non-UCITS hedge funds and UCITS funds are 18.91% and 16.80% respectively. Lower fees charged by underlying UCITS funds allow asset managers to gain exposure to sophisticated hedge fund strategies in their portfolios without passing on higher fees to their clients.
It is clear that asset managers would be able to benefit from the range of advantages that alternative UCITS can offer, including liquidity, transparency, regulation and costs among other factors. Indeed, UCITS vehicles offer asset managers the ability to incorporate complex hedge fund strategies into their client portfolios under a greater level of protection, and as a result, the appetite for asset managers appears to be higher than that of the rest of the hedge fund investor universe.