Hedge funds switch to UCITS III

Date: Friday, March 27, 2009
Author: Barney Hatt, Trustnet.com

Daniel Broby, chief investment officer of Silk Invest, a London-based boutique asset management firms with a focus on Africa and the Middle East, says an increasing number of hedge funds are planning to roll out vehicles based on UCITS III legislation.

Broby says: "A lot of hedge funds are switching to UCITS III. They might be doing it for transparency and they might be doing it to address the challenges of hedge funds. A number of them might be doing it because their high water marks are so under the water that by relaunching they sink their high water mark.

"The hedge fund industry is great at reinventing itself. At the moment governments are bashing offshore centres but hedge funds are the next logical step for them to tighten up on hedge fund regulation as well."

In the past hedge funds have been reluctant to embrace the UCITS route, but Broby believes investor demands are forcing a change in outlook.

He says: "The issues that hedge funds have had with UCITS previously is the lack of leverage and side pockets, but right now people want liquidity and they don’t want lock-ins so I believe UCITS funds are the way forward.

"In the current climate you can’t say to someone ‘look I’ve got a hedge fund and I want you to tie yourself up for two years in this market.’ They are just going to tell you to get lost. In the past people were prepared to do that for the promise of extra returns."

Silk Invest is launching two Luxembourg-domiciled UCITS regulated funds - one focused on Africa and one on the Middle East – on March 27.

Earlier this month hedge fund manager Brevan Howard Asset Management launched its first UCITS III fund, the Luxembourg-domiciled Absolute Return Bond Plus Fund with $250m from the Brevan Howard Master Fund.

The firm has also announced plans to launch a series of UCITS III funds targeted at pension funds and other institutions that will invest in derivatives such as fx options and inflation swaps.

Peter De Proft, director general of the European Fund and Asset Management Association (EFAMA), believes UCTIS funds are going to benefit from the market downturn, as transparency and liquidity come to the fore.

"If there is one positive thing that will come out of the crisis, it is the UCITS brand," he says. "Banks were going broke and getting bailed out, but I haven’t seen any funds in Europe getting bailed out. The framework for UCITS is there and it works well and shows they are a safe investment."

UCITS funds will become the "benchmark for transparency," especially with the new Key Investor Information document which will replace the "simplified prospectus" as a part of UCITS IV, De Proft says