Fri, Nov 24, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

ESMA proposals will impact Eur3bln of CTA UCITS assets: Alix Capital

Monday, December 10, 2012
Opalesque Industry Update - Alix Capital, the Geneva-based investment boutique specialising in regulated alternatives investments, is publishing a paper which reveals that ESMA proposals limiting the use of indices by UCITS funds will require a change in investment approach for EUR 3 billion of CTA UCITS assets. The paper discusses the impact of the regulation and examines the options available to CTA managers to ensure compliance with the ESMA proposals.

Current UCITS regulations do not allow direct investment in commodities therefore many CTA managers use indices to gain commodity exposure. The ESMA consultation, entitled “Guidelines on ETFs and other UCITS issues: Consultation on recallability of repo and reverse repo arrangements”, published in July 2012, proposes new guidelines governing UCITS eligible indices that directly impact UCITS CTAs/managed Futures funds.

ESMA recommends that an index should be transparent and replicable to be UCITS-compliant, and that rebalancing more frequently than weekly will no longer be acceptable. This poses major problems for CTA managers using proprietary indices as the methodology is their intellectual property, and disclosure of its constituents could enable competitors to replicate their strategy.

UCITS CTA funds utilising indices for commodity exposure account for around 50% of all the assets managed in the strategy and of the 10 largest UCITS CTA managers, seven use the index structure. The majority of CTA funds using an index structure will have to rethink the way they implement their strategy if the ESMA recommendations are ratified across Europe in their current form.

Alix Capital’s UCITS Alternative Index Quarterly report for Q3 2012 revealed that the number of CTA UCITS funds has grown from nine to 55 from January 2008 to September 2012, and that assets under management for the strategy surged from EUR 1.57billion to EUR 6.09billion over the same period.

Louis Zanolin, CEO of Alix Capital, says: “The ESMA recommendations will have a major impact on the alternative UCITS sector. Asset managers will need to make significant changes to ensure compliance, which is key if the sector is to continue its recent growth trend. CTA managers will not be able to cope with these new regulations in their current form, however there are options available.

“We expect a large portion of UCITS CTA managers with commodities exposure will choose to replace indices with certificates, a type of debt instrument, as this will allow them to maintain the desired commodity exposure while avoiding the upcoming index constraints. Only time will tell how exactly the regulations will affect CTA managers in practical terms, as each country is still in the process of implementing the ESMA recommendations into their national law. Commodities are an important asset class for investors seeking to build a diversified portfolio and for ESMA regulations to force managers to use complex methods to gain exposure to this asset class makes little sense. In our view it would be more beneficial to consider allowing UCITS funds to invest directly into commodity instruments. ”

Below is a summary of the options for CTA managers, which are explained in full in the Alix Capital paper:

Maintain commodity exposure utilising different instruments

Structured financial instruments, such as certificates, are an alternative to indices for CTA funds to gain exposure to commodities. Certificates are debt instruments, categorised as transferable securities and used to either replicate performance of commodities exposure, or of an entire portfolio. They are bound to the same restriction as any other investment in a UCITS funds and cannot represent more than 10% of the fund allocation. The composition of the certificate is however not governed by the UCITS rules and it can therefore invest in non-eligible assets such as commodity derivatives. Certificates also have to meet specific constraints in terms of independent valuation and liquidity and also require approval by the regulator on a case by case basis. Certificates are not ideal solutions as they introduce an additional layer of costs and introduce additional counterparties and therefore risks.

Abandon commodity exposure

Some CTA managers with little exposure to commodities may choose to abandon exposure to the asset class altogether. Some are already working on models excluding commodities and will therefore adapt to the constraints relatively easily. However, for most managers this is unrealistic given the level of allocation to commodities for the purposes of diversification and decorrelation. For those who do abandon the commodity exposure it could take some time to convince investors that they can effectively run their strategy without exposure to this asset class.

Maintain the index approach:

If managers choose to continue using an index to gain commodity exposure they will have to fully disclose both their methodology and positions, and limit the rebalancing frequency to weekly. The issue of transparency will prove difficult for CTA managers, who naturally wish to maintain their competitive edge. As individual countries decide how to interpret and implement the ESMA regulations they may consider accepting a general strategy description, which enables managers to keep specific elements of their strategy confidential. They may also consider allowing managers to disclose the index methodology with sufficient delay to prevent others replicating their strategy.

(press release)

Alix Capital is a Geneva-based investment company specialising in alternative investments. Founded by a team of experienced alternative investment specialists, Alix Capital provides research and advisory services to the institutional investor community in the field of absolute return investing. The Company is responsible for the calculation, licensing, branding and marketing of the UCITS Alternative Indices. www.ucits-alternative.com.

If you would like to receive a full copy of the CTA paper please contact Broadgate Mainland: Sally Moore/ Chiara Barreca, Tel +44.(0)207.726.61.11, smoore@broadgatemainland.com / cbarreca@broadgatemainland.com

Bg

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. Tourbillon Capital, a $3.4bn hedge fund that's been sounding the alarm about 'frothy speculation,' is suffering big losses[more]

    From Businessinsider.com: Tourbillon Capital, a $3.4 billion hedge fund firm led by Jason Karp, is suffering. The firm's flagship Global Master fund is down 3.5% for the first 17 days of November, bringing performance for the year to November 17 to a loss of 10.6%, according to a note to investors s

  2. Fund Profile - The Tiger of Silicon Valley: Glen Kacher's sizzling hedge fund[more]

    From Forbes.com: When you live and work in a town where the median home costs $2.7 million and hobnob with the executives of billionaire factories like Facebook and Tesla, it's easy to see why you might think technology stocks are invincible. So far in 2017, the Nasdaq Composite index has gained 25%

  3. Launches - Asset manager launches Europe's first bitcoin mutual fund, Prime Capital Aviation Debt Fund enables aviation debt investments for institutional investors[more]

    Asset manager launches Europe's first bitcoin mutual fund From Coindesk.com: A French asset manager has announced the launch of Europe's first mutual fund centered around bitcoin. Announced today, Tobam's alternative investment fund perhaps represents the latest bid to attract institutio

  4. Legal - Consumers say hedge fund financed illegal tribal lending, New York's highest court permits shareholder of a Cayman-incorporated company to bypass Cayman law and bring derivative action in New York[more]

    Consumers say hedge fund financed illegal tribal lending From Law360.com: Vermont residents on Tuesday hit a hedge fund with a proposed class action in federal court alleging it helped concoct a sham tribal payday lending scheme meant to skirt laws preventing companies from charging cons

  5. Investing - Tech still hedge funds' sweetheart sector: Goldman Sachs, Hedge funds haven't been this leveraged to buy stocks since the bull market began, Top financials hedge fund details short bet against Morningstar, Fund CRC presents an offer for Carige's consumer credit unit, Hedge funds sell shares in Altice USA after difficult quarter[more]

    Tech still hedge funds' sweetheart sector: Goldman Sachs From Reuters.com: Tech stocks remain the largest net sector exposure for equity hedge funds, which are set to deliver their strongest returns since 2013, Goldman Sachs said on Wednesday in a note on the industry's most and l