EU Passport for Global Macro
Millennium Global, an alternative investment manager with around $12 billion under management, is working with a bank to launch a UCITS III-compliant version of the Millennium Global Quantitative Fund. Arne Hassel, head of Millennium’s Global Tactical Asset Allocation program, discuses this major new development.
Mr. Hassel founded and was chief investment officer of Corylus Capital, a systematic global macro hedge fund, before joining Millennium. Earlier in his career he worked for seven years at Goldman Sachs Asset Management, where he was a managing director and led global currency management before becoming head of the hedge fund strategies group in London. He was also a member of the GSAM international asset allocation committee.
UCITS III, or “Undertaking for Collective Investment in Transferable Securities III”, is a European regulatory framework that aims to set protective standards for the retail fund industry. This framework is now established as a “Good Housekeeping” seal of approval not only for retail investors but just as importantly for institutions.
Currently around €4.6 trillion of assets are managed in UCITS III funds, which account for some 75% of the European fund industry.
“By meeting the regulatory standards, the funds get an “EU passport” for retail distribution. This stamp of approval is increasingly recognized by investors globally.”
Opalesque Futures Intelligence: What does Millennium do?
Arne Hassel: Millennium was founded in 1994 and started with currency management, which is still the main part of the business. Since 2000 the firm has developed into an alternative investment manager with a suite of products, including global quantitative macro. Our client base has so far been mainly institutional, but Millennium is looking to increase its presence in the retail market by moving into UCITS III for macro and currency strategies.
OFI: Do other European hedge fund managers want to develop this type of fund?
AH: There is interest in offering diversified alternative products in the retail market. We’ll probably be one of the early participants. We plan to launch our quantitative global macro program in UCITS III format this summer.
OFI: Why did you pick global macro?
AH: After the events of last autumn, the focus has been on investments that held up well during the crisis and that are liquid and properly regulated. I think that is why we have had requests to launch UCITS III funds of our macro and currency programs.
OFI: What is the impact of UCITS III?
AH: The broadening of the investment opportunities within European fund regulation makes sense. Regulation has to protect investors, but without preventing diversification and flexible risk management. Skill and opportunities are key to performance. The more flexibility you have, the more efficiently you can manage the investments. And this allows you to reach the return target with less risk. At the same time, investments have to be monitored and investors have to know what they are buying. UCITS III is a step in the right direction and will make it easier to strike this balance.
OFI: How will this affect the fund market?
AH: We now have a chance to offer diversified investments – with low correlation to major asset classes – to a wider spectrum of investors. This both improves the range of available investments for mutual fund investors and takes away some of the risks with hedge fund investments.
OFI: What are the safety measures for investors?
AH: The UCITS III framework provides several advantages to investors. The first major benefit is increased transparency, with regulators raising the bar and demanding detailed reporting, including semi-annual and annual audited reports. This makes it easier for an investor to evaluate the fund. The second advantage is liquidity. Bi-weekly liquidity is a minimum requirement and some funds are now offering daily liquidity. UCITS funds are prohibited from using “gates” or any other restrictions on redemptions. The third plus is risk management, with clear diversification requirements and limits for market and counterparty risk. For example, a fund is not allowed to have more than 10% exposure to any one credit provider.
OFI: What happens when there are problems?
AH: You have to submit reports outlining any problems such as delays in valuation or settlement. This provides incentives to avoid problem areas, increasing investor protection.
OFI: How did you decide to launch a mass market fund, given that the firm has an institutional focus?
AH: We are very client-driven when it comes to new products. When several clients asked us about UCITS III, we had a close look at it. We fit within the regulated framework because we provide highly diversified investments in the most liquid futures and currency markets. This means that we can offer daily liquidity and actively manage our risk.
OFI: What does a manager get in return for the work necessary to comply with the regulations?
AH: The framework offers advantages to fund managers as well as investors. Previous regulations were well meant but did not allow for the kind of diversification that we provide. The UCITS III directive allows funds to invest in a wider range of financial instruments, including derivatives such as futures and currency forwards. This is the key reason quantitative global macro funds – such as ours – can be launched within the format. By meeting the regulatory standards, the funds get an “EU passport” for retail distribution. This stamp of approval is increasingly recognized by investors globally.
OFI: What’s the interest of the bank involved in this launch?
AH: Many banks are now looking for diversified UCITS III products on their platforms. Our macro program seems to fit the bill.
OFI: Would you describe the program?
AH: Millennium Global has been active in discretionary macro investing for several years. In 2007 we started a quantitative program and in 2008 the system was expanded to a fully diversified global quantitative macro program. The system invests in close to 45 markets worldwide, using over 60 models organized in eight different strategies—a relative value market-neutral strategy and a short-term directional strategy for each of the four major asset classes. So there is plenty of diversification. The program has performed well. Last year we were up around 7% with a low risk target and we are positive this year as well.