A UCITS compliant fund poses a number of implementation challenges for a trend following strategy, and Man’s new offering is an interesting case study on how an industry leader is tackling these issues. For a widely diversified strategy like AHL, for example, which allocates to over 150 instruments across 36 exchanges, 24 hours a day, the UCITS III restriction on commodities exposure would constrain the program significantly. Investment banks and other service providers have formulated various methodologies to allow a program like Man AHL to achieve UCITS compliance. UCITS Hedge recently spoke to Man Investments to find out how Man implemented AHL’s trend following process in a UCITS compliant vehicle, what they believe the opportunities for the fund are, and how they plan to execute the strategy. Not surprisingly for an investment management firm predicated on ongoing research, we find that Man AHL Diversity is continuing to evolve to meet investor needs.
Structure
“For us, the most important thing was to preserve the process that AHL executes as closely as possible,” says John Bennett, Head of UK Distribution for Man Investments. “We had a choice: do we trade the [UCITS] eligible assets directly and leave out the ineligible assets or do we access the whole trading programme.” Deciding for the latter option, Man AHL Diversity accesses the AHL Trend Index, an index Man has created to access AHL’s diversified systematic trend following program. The AHL Trend Index replicates the risk and return characteristics of a highly diversified portfolio of futures and forwards. The Index was approved via the regulator, Commission de Surveillance du Secteur Financier (CSSF) as part of the prospectus for Man AHL Diversity. Man AHL Diversity then accesses the AHL Trend Index through a total return swap with Deutsche Bank as the sole counterparty currently.
To comply with the UCITS III requirement of less than 10% counterparty risk to any one counterparty of such swap, Deutsche Bank posts eligible assets back to the product to mitigate credit risk. In excess of the assets required by the UCITS rules, the product aims for a 100% collateralisation of the swap. In the event that a counterparty becomes insolvent, according to Bennett, investors in Man AHL Diversity would realize value from the assets posted as collateral. Bennett notes that Man considers adding additional swap counterparties in line with the growth of the fund. The entire structure is very similar to the construction of most ETF funds, which also use collateralised swaps to gain exposure to the respective indices they track.
Terms
Man will require a £1,000 minimum investment, targeting the mass affluent market. “The target market is those investors who understand asset risk, who are coming to us through an adviser,” says Bennett. With, for example, a 5% target portfolio weighting for hedge funds in a traditional balanced portfolio of stocks and bonds, Man AHL Diversity is within reach of anyone with a minimum £20,000 investment portfolio. In order to promote the fund, Man Investments has initiated online continuing professional development courses, which train brokers and independent financial advisers on the ins and outs of trend following strategies and AHL in particular. In addition, Man enlisted Dexion Capital as a distribution partner. Prospective investors should note that Man is subsidising Dexion’s distribution fee, so they are not disadvantaged either way.
Bringing all this down to the bottom line, Man AHL Diversity’s UK investor base is paying out around 30 basis points for the swap, plus a 25bp for usual administration costs for the fund. In return, investors enjoy a product in their home currency, redemption proceeds taxed at the favourable capital gains rate of 18% subject to the fund receiving reporting fund status, with weekly liquidity (three days’ notice is required) and a low minimum investment requirement. Similar to most alternative investments, investors will be paying investment management fees of 2% of NAV and 20% of performance subject to a high water mark (no minimum performance hurdle is required). Bennett believes that the target volatility of 11% for Man AHL Diversity compared to other offshore funds is appropriate for the UK market.
Historical performance
Based on simulated figures for Man’s flagship AHL Alpha programme, adjusted for fees and costs for the UCITS compliant vehicle, Man AHL Diversity would have achieved an annualised return of 13.7% from October 1, 1995 to the end of 2009, with a maximum drawdown of 12.8% and a Sharpe ratio of 0.65. This compares favourably to both global stocks and bonds, which returned 5.4% and 7.7% annually over the same time frame, respectively. Perhaps more important, however, is that correlation to equity markets is a low -0.15. During a difficult year like 2008, AHL Diversity would have let investors sleep at night, returning over 24% as equity markets nearly halved. Less immediately enticing is the fact that AHL Alpha plc is currently in its deepest drawdown at 13.2%. Despite strong performance in stocks choppy, trendless markets in sectors including bonds, currencies and energies detracted from performance in 2009.
With current Europe-wide estimated assets under management of over €125 million, Man AHL’s UCITS foray has yet to become a significant distribution channel when compared to the $22.3 billion in the overall strategy. However, if Man raises even a tenth of the amount of its offshore assets via UCITS vehicles, it would dominate the market for UCITS-compliant trend-following strategies and become one of the leading UCITS hedge funds overall. Bennett is clear that the different vehicles will still serve one clear investment function: “The reasons for buying AHL are the same for an onshore investor as they are for an offshore investor.”
