The big problem, however, remains the inability of many hedge fund strategies to fit into the tight UCITS rules. “UCITS takes away a lot of investors’ key concerns but the additional [strategy] restrictions have a very important impact on the outcome for investors”, says Ulrich Keller, chief investment officer of alternative funds solutions at Credit Suisse.. “If volatility is restricted, then even if a manager is really good, investors cannot expect returns comparable with offshore funds. Volatility of many UCITS hedge funds is just too low, which is why institutions generally prefer offshore funds or are looking for specific UCITS [funds] that meet their target.”
The introduction of AIFMD could prove to be a serious competitor to alternative UCITS. The alternative investment fund (AIF) under AIFMD is a fully passportable, regulated structure without restrictions on liquidity or trading. “AIFs include the best elements of UCITS without the investment and liquidity restrictions that sometimes hinder performance of alternative UCITS compared to offshore funds following similar strategies”, says Donnacha O’Connor, partner at Irish law firm Dillon Eustace.
“Hedge funds will need to have AIF vehicles to be active in Europe in the future. It is important to have an onshore offering as investors want more regulated structures”, says Fabrice Cuchet, global head of alternative investments at Dexia. “The challenge has been to have a wrapper with enough flexibility to deploy hedge fund strategies. AIFs answer that need.”
The less constrained nature of the AIF allows for better alignment of the liquidity preferences between hedge funds and institutional clients, too. “AIFMD may act as a catalyst for the largest European institutional investors to invest onshore and reallocate to AIFs”, says Nathanaël Benzaken, deputy head of the alternative investments business line at Lyxor Asset Management.
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