UCITS III compliant fund launches are the one area that has bucked the trend of 2009 being a slow year for new launches and we expect to continue to see significant activity in 2010. To date, there are thought to be 265 single manger hedge funds operating within a UCITS III wrapper running $47 billion in assets under management. In six months time, however, the number of managers is expected to reach 400 plus. Furthermore, with UCITS IV set to be implemented in 2011 (this is designed to enhance the UCITS brand and make cross-border fund mergers and distribution more efficient), we believe there will be yet further interest from hedge fund managers considering a move into the UCITS space.
34% of investors will have investments in the UCITS III space in the next 12 months. 75% of these investors are based in Europe, 16% in the US, 6% in Asia and the remaining few percent spread around Latin American, the Middle East and Australia. Of the US investors who have invested or are looking to invest, the majority have European entities and offices.
As Fig. 2 shows, UCITS III appetite is strengthening substantially. In 2009, 14% of investors surveyed held funds in a UCITS III wrapper and 4% of investors were considering investing. In 2010, this has increased to 21% of investors having UCITS III investments and a further 13% of investors looking at the space. Year on year, we have seen over a 50% increase in interest.
When investors were asked about the structures they had put around their UCITS investments, 5% of investors have already set up a UCITS compliant fund of funds. 11% are planning on doing so in the next 12 months.
We were very surprised by the high number of investors who said they would choose to invest in a UCITS III fund over a Cayman vehicle. It seems that the regulatory framework of UCITS and risk controls provide significant reassurances to many investors. The issues of course arise when trying to exactly replicate a hedge fund, particularly when a fund operates in the less liquid space. It seems should there be no issues with tracking error and plentiful funds in each strategy that a significant number of investors would be migrating to the UCITS III structure.
69% of investors do not anticipate investing any money in UCITS III compliant funds, however, on the flip side, 4% of investors see over 20% of their assets being in UCITS III compliant funds and 11% between 5-10%. Furthermore, we think that this statistic should in fact be far greater. To date there are certain regions that have embraced UCITS III funds to a much greater extent than others. Spain and Italy are examples of such regions. The hedge fund investor base in both regions is predominantly retail investors. The UCITS III minimum investment size (this can be as low as $10,000) therefore has great appeal. It is much smaller than the minimum ticket size for a hedge fund and the liquidity and often fees are also more appealing to investors. Many investors can therefore get access to hedge fund returns but with added regulation, liquidity and smaller ticket sizes by investing in a UCITS III absolute return fund.
Managed Accounts
We see strong evidence from our survey results that we are experiencing a genuine structural change in the hedge fund industry. Investors continue to have huge appetite for investing via managed accounts and we see few signs of this slowing down. The reasons why managed accounts continue to grow in popularity are well known. They are, however, worth reviewing and include the following:
– The sub-prime mortgage collapse and subsequent credit market problems
– Lehman’s failure and subsequent instability of the entire financial system
– The Madoff affair and subsequent losses for investors
– The liquidity issues of various funds where they had to employ drastic measures such as gating and freezing assets, to ensure they didn’t unwind positions into a falling market place.
The knock-on effects of these events have left investors clamouring for liquidity, transparency and control which managed accounts are designed to deliver. Gating, in particular, was difficult for many investors and it has definitely been an important catalyst for money moving away from direct hedge fund investing and into managed accounts. It is clear that appetite for managed accounts is not a knee-jerk reaction to the events of 2008. This is confirmed by comparing data we took from 2009 against that of 2010. Many investors have executed and invested via managed accounts, as they said they would in 2009. Only 9% of investors already used managed accounts in 2009. This, however, has grown in 2010 to 14%.
The percentage of investors who said they would
be “more likely” to invest via managed accounts
has fallen away from 43% to 26%, however, given there are no longer the pressing issues of 2008 and 2009, this percentage seems like a more realistic figure.
