Tue, Sep 23, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Investors should perform greater operational due diligence on Ucits hedge funds, states industry expert

Thursday, June 23, 2011

David Miller
Opalesque Industry Update - Reporting from the GAIM conference in Monaco, the peer group network COO Connect noted that hedge fund industry expert, David Miller, a partner at the £3.6bn ($585 bn) investment management house Cheviot Asset Management, believes that investors should perform greater operational due diligence on Ucits hedge funds. Miller urges that investors should not assume that onshore regulated products are safer than their offshore versions.

Miller pointed out that while Ucits vehicles have many positives including better transparency, generous liquidity and a more favourable tax treatment for UK investors, this should not be an excuse for complacency among investors.

“Investors need to understand the strategies to ensure what they buy into is what they get. Just because a fund is Ucits rather than Cayman does not make it safer in any way. This situation is similar to when investors bought into listed hedge funds prior to 2008. Many investors believed these funds offered low volatility and absolute returns. Many unfortunately turned out to be highly correlated much to the disadvantage of investors during the crisis,” he said.

COO Connect reports: “While urging greater investor operational due diligence on Ucits, Miller simultaneously stated Ucits hedge funds needed to become more focused on seeking absolute returns for their clients. He stressed that Ucits hedge fund managers must be more ambitious and should focus on real returns after inflation for some of their less risk-averse clients – particularly the ever growing number of funds of hedge funds who are allocating into the Ucits space post-crisis. This is important given that many Ucits funds are suffering a decline in the real value of their wealth. Furthermore, Ucits vehicles often face higher prime brokerage fees and marketing costs than unregulated entities which inevitably eats into their profit margins.”

“Ucits hedge funds do have a lot of advantages but managers do need to think more about the total expense ratio. The prime brokerage and marketing costs of these funds is higher than those of offshore hedge funds. Given that Ucits are not making as much money at the moment, these costs are going to eat into the fund’s profits. To solve this predicament, I think Ucits hedge fund managers need to seek more ambitious returns and diversification with different rules for different clients. Balance is important,” Miller acknowledged.

However, there is growing concern in some quarters about fund managers shoehorning illiquid strategies into Ucits hedge funds. There have been warnings that such behaviour could facilitate a liquidity crisis in Ucits resulting in widespread investor resentment and mistrust. This is something Miller believes is a distinct possibility. “If there is a crisis situation and everyone is trying to get out of the market, there could be a liquidity problem among Ucits,” he highlighted.

Ucits have enjoyed a major investor uptake following the aftermath of the financial crisis. In February 2011, a Deutsche Bank survey of sophisticated investors revealed inflows into Ucits III absolute return vehicles could significantly outstrip allocations into Cayman funds. These investors, albeit overwhelmingly European, said they would allocate more than $185 billion into Ucits III hedge funds over the next 12 months. In 2010, Cayman-domiciled funds experienced $55 billion in capital inflows.

The Deutsche Bank Hedge Fund Capital Group estimated there are $150 billion in assets under management in Ucits III absolute return funds. Furthermore, the February survey indicated this figure could more than double over the course of the year. It also revealed 72% of wealth management firms, 67% of family offices and 61% of private banks preferred Ucits structures to the traditional offshore model.

Beverly Chandler

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. SEC charges 19 investment firms and one trader for breach of Rule 105[more]

    Benedicte Gravrand, Opalesque Geneva: The Securities and Exchange Commission (SEC) started a push to enhance the enforcement of Rule 105 of Regulation M last year to uncover hedge funds and private equity firms that have illegally participated in an offering of a stock after short selling it duri

  2. Outlook - Julian Robertson: There are two bubbles that can bite us[more]

    From Businessinsider.com: Legendary hedge fund manager Julian Robertson gave a warning about two bubbles that could "bite us" at Bloomberg Market's Most Influential Summit. "I agree with the fact that the economy is definitely getting better. I think the cause of that is two bubbles that will

  3. Fund managers, bullish on Europe, anticipate monetary policy separation of Fed and ECB[more]

    Komfie Manalo, Opalesque Asia: At least 202 fund managers with $556bn of assets under management said that while the European Central Bank (ECB) has eased its monetary policy that sent sentiments towards Europe to pick up, the Fed is expected to hike its rate in the spring of 2015. Investor

  4. Institutions - North Carolina workers call on state pension to dump up to $6bn in hedge funds, UK pension fund criticizes hedge fund fees[more]

    North Carolina workers call on state pension to dump up to $6bn in hedge funds From Forbes.com: The State Employees Association of North Carolina this afternoon called on state Treasurer Janet Cowell to withdraw all investments in hedge funds, which appear to amount to approximately $6 b

  5. News Briefs - Limited partners of investment managers may be subject to self-employment taxes, Just one week left until NYC's Rocktoberfest[more]

    Limited partners of investment managers may be subject to self-employment taxes On September 5, 2014, the Internal Revenue Service (“IRS”) issued Chief Counsel Advice 201436049, concluding that members of an investment manager were subject to self-employment taxes with respect to their e