Investors back Ucits hedge multi-manager model in theory, if not in practice

Investors in Ucits hedge funds overwhelmingly believe in the fund of funds model for investing their vehicle type, but it is not clear they are putting their money behind them, as 40% of the products hold €20m or less.

In surveys of the offshore hedge fund industry, investors typically say between $50m and $100m is the minimum size for a workable hedge fund, and funds of funds need more to spread their risk adequately between funds, and conduct due diligence, among other expenses.

This suggests many funds of Ucits hedge funds are sub-scale.

Louis Zanolin, CEO of Alix Capital, which conducted the study, said managers should "carefully consider their investment and marketing proposition in order to transform Ucits funds of hedge funds into a long term success story".

Alix has deep insight into the onshore hedge fund industry, as the index it publishes has more than 850 funds with €127bn total assets.

Some 70% of respondents to the study, conducted in June, believe the fund of Ucits hedge fund model remains a valid one.

Alix statistics suggest the number of fund of Ucits hedge funds has increased 64% a year since 2008.

Over the same period the fund of offshore hedge fund industry shrunk by about 450 portfolios, to 1,988 products in total by March, according to Hedge Fund Research.

However, 15% of those polled by Alix said the fund of onshore funds model was not valid, as there were too few Ucits hedge funds on offer, and there were limits to use of strategies associated with the Ucits-compliant structure.

Better regulation of fund counterparties and higher legal oversight are seen as the main benefit of Ucits funds of hedge funds, then the broader distribution possibilities.

Zanolin said: "Ucits funds of hedge funds are a natural evolution of the development of the single Ucits hedge funds market."

At the single fund level, Ucits hedge investors appear to be preparing for ‘more of the same', as three strategies well placed to withstand, or benefit from, market shocks are the most popular for larger allocations over the rest of this year.

Overall, more than half of Ucits hedge fund investors intend to increase their holdings of equity market-neutral, macro and volatility strategies.

The news is not so good for strategies of fixed income and directional equity, where 24% and 18% of respondents expect to reduce allocations.