With the dust still settling since the implementation of the AIFMD, Laven Partners is seeing an increase in the number of fund managers who now are considering implementing their alternative strategy in a UCITS fund. Those concerned about the marketability and uncertain benefits of complying with the AIFMD might find solace in the familiar brand of UCITS.
Operational and marketing advantages of a UCITS fund
Until UCITS V enters into force, remuneration rules and the availability of experienced service providers are still material considerations in deciding an appropriate regulatory regime for fund managers. Certainly, the AIFMD’s granular focus at the manager’s level, on their business as well as on their operational soundness, dampens spirits in comparison to the UCITS regime’s application at the fund level. Additionally, the principals of a start up or small cap fund are unlikely to disregard the strict deferred remuneration requirements of the AIFMD.
When electing to launch a regulated fund, managers ask themselves whether the marketability of the fund justifies the incremental set-up and running cost. For institutional investors, UCITS is an established and trusted brand that offers one of the highest levels of investor protection. A 2013 study found that the size of UCITS sector in the hedge fund industry has grown by 260% since 2008. As of 2014, there are over 76,000 registrations for the sale of UCITS funds, holding approximately €6.9 trillion in assets and being sold in 86 countries. A survey published by Deutsche Bank in September 2014 determined that investor allocations to alternative UCITS have doubled in the preceding year and that the majority of alternative UCITS investors have plans to increase their allocations over the next 12 months.
On the topic of marketability, a non-EU based fund manager cannot ignore the efficiency with which one can presently market a UCITS across the EU. Under the current directive, UCITS may be marketed across the EU regardless of where its manager is established. However, a non-EU based manager of an alternative investment fund must adhere to the national private placement rules for marketing, which can be a slower, costlier and inefficient process (for more details see our AIFMD Solution Desk page).
UCITS strategy constraints
Despite the aforementioned issues, the case for electing a UCITS is not obvious. Some of the more striking elements of the UCITS regime are the restrictive investment eligibility criteria and the regimental diversification rules, being the 5/10/40 rule, which are not present under the AIFMD. For instance, under the UCITS regime, one would be restricted from directly exposing a portfolio to commodities and precious metals. It would only be through the use of swaps derivatives or index linked securities, subject to regulator approval, that a UCITS could gain any exposure to the commodity segment of the market.
The converging content of the UCITS and AIFMD regimes may lead to the remuneration and marketing comparison being immaterial in the long run. However, managers seeking to establish a fund should note that remuneration and marketability differentials between the two regimes will likely not be disappearing any time soon.
How can we help?
Implementing hedge fund strategies, such as absolute return, that are UCITS compliant are feasible but complicated endeavours, especially for traditional offshore hedge funds that may not traditionally have a tightly contained investment policy.
Laven Partners can assist in breaking down your model portfolio and assessing whether it is trading UCITS eligible instruments, whether risk can be managed with sufficient confidence levels and whether it would meet the UCITS diversification requirements. Our feasibility assessment is a tailor-made report aimed to inform clients whether a UCITS fund is an option to consider.
Laven Partners also provides regulatory structuring and operational advice for fund formation, ongoing management and distribution.
For further information, please contact [email protected] – +44 207 594 4976.
You can also download our recently released 3rd edition of the Definitive Guidebook to UCITS funds.
