FundLogic can offer products ranging from simple index funds through to complex investment solutions for institutions. It draws on the combined resources of the Morgan Stanley group, including its considerable expertise in both investment management and investment product distribution.
Morgan Stanley originally created FundLogic Alternative Plc as a UCITS III fund platform, based in Ireland. Its main objective is to enable investors to access alternative managers within a regulated format. UCITS Hedge caught up with David Armstrong, Global Head of Fund-Linked Products at Morgan Stanley, to find out more about FundLogic, its hedge fund offering, and where he sees the market for platform-based UCITS hedge funds going.
UH: How easy has it been to add a UCITS hedge fund option to the FundLogic platform? Why?
DA: Actually, yes it was fairly easy. The rationale is extremely simple, and based on two considerations for us: firstly, the change in market demand in the wake of the credit crisis. By this I mean the focus now on liquidity and transparency on the part of hedge funds. And secondly, there is the foot print that Morgan Stanley already has in the hedge funds space. We already play a key role in this field as a prime broker and can continue to help hedge funds with our other capabilities.
UH: What was the original rationale behind the launch of FundLogic in 2006, and has it travelled far since then?
DA: We created FundLogic in 2006 to support the needs of an asset management company within Morgan Stanley’s investment banking division. We have been using it for years now to launch UCITS funds. The addition of the option to launch hedge funds using it is merely a continuation of that.
UH: Why did you decide on Ireland as the default domicile for FundLogic funds? Can managers opt for an alternative domicile if they want one?
DA: We were faced from the start with a choice between Ireland and Luxembourg. They represent very different advantage sets. Ireland made a lot of sense to us, as we have an existing fund platform in Ireland
UH: Are you happy with the turnaround of fund approvals by the Irish regulator?
DA: Yes. Obviously, when you launch your first fund the process takes longer, but now we have shared all the details of the structure we are using, it is getting much easier.
UH: Has the sudden interest on the part of hedge fund managers in UCITS vehicles been a surprise to you?
DA: No, not really. Over time everyone realises that things are changing and that there is a need to adapt business models to meet those changes. And after the financial crisis, it was predictable that investors would turn to more regulated, risk-controlled investment solutions. That is why we have been working on developing and promoting our fund-linked offering as it caters to this new breed of more careful and cautious investor. Many hedge funds are now waking up to the opportunity that UCITS represents. Many have launched a UCITS equivalent to their original strategy.
UH: What characteristics do you feel make for a good UCITS platform?
DA: First, you need to have solid infrastructure in place to help with the creation and maintenance of the fund itself. Second, you need access to the best hedge fund managers. Third, you need a top notch distribution operation. At Morgan Stanley we already have these three ingredients in place. In terms of our distribution operation, we now have strong institutional and retail networks as well as our internal wealth management division. Our derivatives and solutions group is able to advise on the regulatory and fiduciary constraints that impact funds seeking distribution through some or all of these channels.
UH: Why should hedge fund managers be considering FundLogic ahead of the other established UCITS platforms out there already?
DA: The UCITS hedge fund initiative is now considered of strategic import within Morgan Stanley. This is not a ‘me too’ solution. We combine it with the resources of our prime broking, investment management and wealth management organisations. This alignment of resources is key for hedge fund managers seeking a successful UCITS launch.
UH: Do you think there is a danger the UCITS platform market will become too crowded – that there will be too many banks, each with their pet platform, elbowing for room?
DA: The universe of hedge funds is so deep I think there is room for several players in this space. Additionally, Morgan Stanley is known to provide an all-encompassing service to our clients, be they investors or hedge funds. We leverage our expertise across the firm to deliver a well thought out, comprehensive and adapted range of products to our clients.
UH: How important do you think good distribution capability is for a platform’s success and how can Morgan Stanley really add value here?
DA: Distribution is a very important element for hedge fund managers. Morgan Stanley relies on not only our investment banking distribution capabilities for this, but also on the full distribution power of the group. This guarantees us an exhaustive access to all UCITS buyer segments.
UH: What sort of interest are you seeing from the US in FundLogic and UCITS generally?
DA: We’re seeing a lot of interest. We are talking to hedge funds that already have a presence in Europe but are fielding requests from their clients to establish some kind of UCITS vehicle. We also have a number of talented US hedge fund managers considering the UCITS structure and who see our platform as their opportunity to tap into the European market. We are finding the overall reception to the idea of UCITS launches to be a positive one. It is being seen as a necessary route, and in the last three months we have seen the US hedge fund community becoming really positive. Our prime broking operation is in an ongoing dialogue with dozens of hedge funds about UCITS, and we have six more hedge funds already in our launch pipeline for FundLogic.
UH: Being a recognised Wall Street name and established prime broker for hedge funds, do you think this gives Morgan Stanley an edge in helping hedge funds launch UCITS variants of their strategies?
DA: Yes, absolutely, this makes us very different. To be a leader in the prime brokerage business allows us to draw on our excellence in hedge fund origination and structuring. Morgan Stanley has been a leader and is well recognized in this field. Combined with the capabilities of our swap desks, we are able to differentiate our products from our competitors’. We can combine these with our distribution resources to bring managers a very attractive overall package.
UH: Why is weekly liquidity considered a ‘bad thing’ by many US investors, and do American fund managers take some convincing as to its merits?
DA: Weekly liquidity is still a very new approach for many hedge funds, but actually many strategies will be able to fit the UCITS III liquidity rules fairly neatly. It is more a question of cultural change than a real issue for most hedge funds. If there is a big concern, it is more the worry about cannibalisation, the fact that investors will opt for the superior liquidity of the onshore strategy if it is presented to them. It is more a concern about positioning than practicalities. There are different approaches to this, but managers do seem to want to be able to differentiate between their offshore and onshore strategies in order to avoid this.
UH: Should US fund managers be considering a UCITS launch, and why?
DA: Sure, if they have a true competitive edge and if their strategy is adapted to weekly liquidity, they should be successful in Europe. Also, in searching for new investors’ money, recognizing the potential of European investors is crucial. Not only are European investors savvy, they have been acquainted with UCITS investments for years now. They are thus keen to look out for strong performers with consistent track records and if US hedge funds have both, they should expect the demand to be there.
UH: Are there any strategies you feel are ‘beyond the pale’ in terms of their convertibility to UCITS?
DA: The most illiquid – private equity, distressed, those strategies based on bank loans.
UH: Do you have an internal ‘wish list’ of hedge fund strategies you’d like to launch on FundLogic?
DA: Yes, we have a selection in place. But we manage it dynamically. We work closely with our prime brokerage unit in identifying new potential candidates for UCITS. Obviously, due to some strong and longstanding relationships, PB [prime broking] has developed over the years a detailed knowledge of the universe and helps us very much in identifying talents and narrowing our options.
UH: Are there any strategies you think are under-represented in the UCITS universe, which could be easily launched as UCITS?
DA: The market is dominated by long/short equity and will likely remain so. But we expect to see more convertible arbitrage and CTA strategies launching in the future.
UH: Do you think UCITS hedge funds are being adequately stress-tested in terms of their liquidity deliverables? Is this part of a platform’s responsibility, or should it lie entirely with the investor?
DA: Yes, of course. That being said, capacity in this respect is not limitless. The liquidity set for each fund is valid up to a certain level of assets under management. After that, it is really a question of either closing the fund to new investment, or seeing how you can house new investment in the more liquid part of the portfolio.
UH: Although it is early days still, do you think the passage of the AIFM Directive will mean more or fewer UCITS launches?
DA: Some elements of the directive still need to be clearly defined before we can make a call on this. Generally we feel that what is positive for hedge funds will be positive for UCITS hedge funds.
UH: There remains plenty of uncertainty about the take up of UCITS-compliant hedge funds outside Europe, especially in Asia – are you seeing any interest in FundLogic from Asian investors, and are you confident that UCITS hedge funds will see take up from investors in the region?
DA: The UCITS standard is extremely well recognised worldwide, especially in Asia and Latin America. No doubt this will translate into appeal for UCITS hedge funds as well. FundLogic is already established as a distribution platform for UCITS in Asian markets, and with the long only product set, we see the structure of UCITS being appreciated by regional investors.
David Armstrong is a Managing Director at Morgan Stanley and heads the firm’s fund-linked business within the Institutional Equity Division. In this role, he oversees all UCITS III origination and distribution efforts globally and the development of the fund-linked product offering, including Morgan Stanley’s passive Asset Management Company – FundLogic. Previously, Armstrong headed structured products sales for the Americas region at Société Générale in New York. Prior to this, he worked within the Global Equity and Derivatives Solutions division at Société Générale as head of sales for the Italian market, before becoming head of the global capital markets operations. He also chaired the Italian alternative asset management company, Lyxor SGR.
