12 July 2011

Hedgeweek: Alternative UCITS prosper but will QIFs and SIFs spoil the party?

The last twelve months have done a lot to consolidate people's views of alternative UCITS. Fund managers have started to wake up to the obvious benefits of having an onshore vehicle and the value that the UCITS structure can bring.

Every month new funds are being launched, transforming a sector that was once the preserve of equity long/short strategies into one populated by more diverse, complex strategies including event-driven, global macro, credit and CTAs. Peter de Proft, Director General of EFAMA, thinks the hype surrounding alternative UCITS is cooling down: “There’s a much bigger rise in ETFs so things need to be kept in perspective. The growth of ETFs is much more important than alternative or AR UCITS, call them what you will”.

Some worry that strategies are getting too complex. De Proft confirms that a recent meeting of the European fund classification working group was held at EFAMA to assess the different types of funds within the UCITS framework. The French regulator, AMF, proposes to classify them into complex and non-complex UCITS.

“The important phenomenon right now is that regulators are paying attention to investor protection, particularly retail investors. They’re assessing what type of funds are being sold to them, that the strategies are not too complicated to understand, and I think that’s very important”, says de Proft.

ESMA is currently looking into the issue, something EFAMA welcomes. “We have excellent relations with ESMA”, adds de Proft. “We have confidence they and national regulators will continue to enforce UCITS requirements for all UCITS managers in an adequate manner and maintain a level playing field.” Fund centres like Ireland and Luxemburg are benefiting from the way the industry is evolving, and will continue to so under the UCITS IV Directive, which will encourage even more efficiency and transparency.

The evolution of the UCITS framework has allowed Ireland to develop into a well-established domicile for internationally-distributed investment funds, both in the UCITS and more flexible qualified investment fund (QIF) structure. According to Palmer, unrivalled depth and breadth of expertise and experience are the hallmark of its industry, not to mention innovation: it was the first jurisdiction to introduce regulation for alternative investment.

Unlike the flexibility of hedge funds, UCITS present two sorts of limitations: firstly, not all strategies (e.g. distressed debt) can be packaged in UCITS; secondly, managers cannot directly access assets like commodities, nor can they directly short sell. They therefore rely on derivatives, which creates an added layer of costs. “Some UCITS restrictions such as short selling can be avoided with the use of derivatives. You can package a lot of things that way, but it comes with additional fees”, explains Samuel Sender, Applied Research Manager at EDHEC-RISK Institute. This isn’t altogether ideal for investors as it impacts on fund performance.

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