UCITS Boast Superior Returns
According to a Bloomberg report, assets managed by UCITS funds have risen to $52.3 billion over the last two years in an effort by hedge fund managers to appeal to investors seeking funds compliant with E.U. rules. UCITS, known by an acronym for Undertakings for Collective Investment in Transferable Securities, are a set of E.U. directives that aim to allow collective investment schemes to operate freely throughout the E.U. on the basis of an from a single member state. In practice, however, many E.U. nations have adopted additional regulatory measures which have complicated free operation with the effect of protecting local asset managers.
Citing information from the Singapore-based Eurekahedge Pte., the Bloomberg article reports that there are about 500 hedge-fund offerings that comply with the UCITS directive. It goes on to say that the funds, which are allowed to use alternative investment strategies such as shorting and leverage to enhance returns, have outperformed mutual funds by 15.2 per cent over the last three years.
According to the Wealth Bulletin, the two largest UCITS hedge funds are managed by JPMorgan Asset Management, and the other three are managed by BlackRock Investment Management, Fidelity International and Newton Investment Management, respectively.
According to an article on HedgeCo.Net, UCITS funds have been performing quite well recently:
The UCITS Hedge Fund Strategy Index gained 0.93% within the first two weeks in March 2010, every strategy except fixed income and market neutral were positive, Global macro not only being the most successful strategy in 2010 but also in March with gains of 2.85% so far.
The other most successful strategies in March are convertible (+1.75%), CTA (+1.70%) and L/S equity (+1.54%), the latter turning positive ytd for the first time.
UCITS funds have been gaining in popularity and will continue to do so, thanks in part to a global push to implement tighter regulation overseeing hedge funds, but moreso because of their increased liquidity, transparency and regulatory oversight as compared to regular hedge funds. In volatile market conditions, many investors preferred weekly redemption rights over more restricted redemption provisions typical of other alternative investments. According to the HedgeCo article, there have been 8 new UCITS fund launches since January 2010 alone.
According to the Bloomberg article,
While UCITS III hedge funds deliver higher returns than fund of funds, they were outperformed by traditional hedge funds over the last three years, Eurekahedge said. The index measuring traditional hedge funds gained about 20 per cent in 2009, compared with a little less than 15 percent by the index tracking UCITS III funds, the report showed.
Traditional hedge funds outperformed by using leverage to boost returns, while strategies including event driven and distressed debt that contributed to strong returns among traditional funds have negligible representation in the UCITS III funds, the firm said.
Despite boasting returns which have easily outstripped regular hedge fund returns in recent years (Hedge funds with UCITS funds have returned 18.2% over the past year with volatility of 10.7%, while the retail firms have generated 13% with volatility of 9.3%. according to the Wealth Bulletin), the same article suggested that UCITS funds may encounter difficulty raising assets. Two of the potential downsides to UCITs funds is that often involve higher investment minimums and higher fees, which may make them less appealing to smaller investors. However, most articles I read suggested that UCITS would experience an increase in popularity.
Although about 41 per cent of UCITS funds are invested in Europe, some 32 per cent are invested globally. Eurekahedge predicted that as UCITS gains more attention and popularity, an increasing number of the funds will start in North America. Presently, the the majority of the funds are based out of Europe, with the U.K. accounting for almost half.
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