The proliferation of “hedge fund lite” products sold in the form of UCITS 3 wrappers has already prompted some commentators to warn of risks, with one of the first firms to make the move, RWC Partners, sounding a cautionary note.
Many of the hedge fund businesses putting funds into UCITS 3 packages are doomed to fail, according to the Financial Times newspaper. RWC rolled out a vehicle in 2006, one of the first to do so.
“I think the story of the next 12 months will be the number of UCITS funds that close down,” Peter Harrison, chairman and chief executive at RWC, was quoted as saying. “There are an awful lot of people who will try it, find it kills their margins because they don’t have the volume and then retreat. You have to accept [the UCITS route] is fundamentally lower margin with higher operating costs and higher distribution costs,” said Harrison.
His comments come at a time when dozens of firms have been launching UCITS funds, such as EFG, Morgan Stanley, Credit Suisse, Deutsche Bank and Threadneedle. Flows into such funds have been strong: net inflows into UCITS funds were €49 billion (around $64.7 billion) for the first quarter of the year, compared with €1 billion in the previous quarter, according to the European Fund and Asset Management Association.
There have been some concerns that some of the underlying investments of these funds may make it difficult for them to deliver on the high standards of liquidity that UCITS funds are supposed to offer. Following the record hedge fund losses of 2008 (down around 19 per cent) and difficulties some investors experienced in liquidating assets, a number of alternative investment firms have packaged absolute return products inside UCITS wrappers. UCITS funds enable managers to use derivatives, for example, to take short as well as long positions. Hence the tag “hedge fund lite”. UCITS funds offer high levels of transparency and liquidity – but not all hedge fund strategies meet such criteria.
John Paulson, who famously made billions of dollars by accurately predicting the US sub-prime collapse, is reportedly launching a fund in UCITS 3-compliant form; meanwhile, York Asset Management, a US firm, and Universal Investment, a German firm, recently rolled out a merger arbitrage strategy inside a UCITS 3 package.