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Ucits hedge funds being unfairly targeted for criticism


Date: Thursday, December 15, 2011
Author: Charles Gubert, COO Connect

Ucits hedge funds have been unfairly vilified for wrapping complex products in the Ucits framework, it has been argued.

“Ucits alternative funds are working within the existing parameters of Ucits. Many of the alternative Ucits are not too dissimilar from what traditional long-only managers are offering their retail clients. For example, many traditional long-only managers run Ucits fixed income strategies which trade credit default swaps (CDS) to gain synthetic short exposures within the portfolio. It is also important to note that complexity does not necessarily equate to risk. A product may be complex but may ultimately deliver what an ordinary retail investor may expect – positive returns with reduced volatility,” said Rhodri Mason, head of Ucits management at Man Investments.

Regulators are concerned about the growth of alternative Ucits. They are worried that some managers have shoehorned illiquid, esoteric products into Ucits absolute return vehicles despite these vehicles offering investors weekly or even daily liquidity. The European Securities and Markets Association (ESMA) recently launched a consultation on whether retail investors are sufficiently protected against the risks associated with the more exotic Ucits strategies.

Others have called for Ucits to be split in two between “complex” and “non-complex.” Asian regulators including the Hong Kong Securities and Futures Commission (SFC), have also expressed their disapproval about some of the products such as synthetic exchange traded funds, which are allowed under Ucits III . The SFC is predictably sensitive to Ucits following the Lehman mini-bonds debacle which saw thousands of widows and orphans nursing losses after they purchased what they assumed were mini bonds but what turned out to be complex structured products.

However, industry experts have complained that regulators are failing to see the bigger picture. “It is true that certain managers have become inventive with what they put into Ucits. But these same managers are generally targeting more sophisticated investors and they are doing this by imposing high minimum investment requirements, which are out of the reach of retail investors. Some of the more recent alternative fund launches, which do not have these minimum requirements and are being imaginative with the products they push into Ucits, are struggling,” said Georg Reutter of Kepler Partners, a Ucits fund distribution business.

Furthermore, there is a risk some regulators might undermine many of the advances, which have been made in the Ucits space over the years. “As an industry we need to continue to trust the Ucits regulations, which give managers the ability to use derivatives for investment purposes in a risk-controlled fashion. Our industry has evolved but the core tenets of Ucits III remain as valid today as when they were introduced nearly a decade ago,” stressed Mason.