Prime Brokers Targeting UCITS Managers

Several prime brokers are looking to capitalize on growing interest among U.S. fund managers in so-called UCITS, a tightly regulated European vehicle that has become a big hit with investors.

J.P. Morgan and Morgan Stanley are pitching a range of advisory services to managers interested in setting up hedge funds under the UCITS umbrella - UCITS being shorthand for Undertakings for Collective Investments in Transferrable Securities. Their focus is on U.S. firms that are largely unfamiliar with the European Union's regulatory framework. J.P. Morgan, for example, is advising managers on how to set up, operate and market UCITS hedge funds. It also is providing custody, capital introduction and other services.

Bank of America, meanwhile, is providing select U.S. managers access to a London-based UCITS distribution platform that currently has five vehicles. BofA plans to add another 14 managers once they've cleared regulatory hurdles. In general, it takes a manager about six months to get a UCITS fund off the ground.

Because of their strict regulatory parameters, UCITS hedge funds can be marketed to retail investors, though they've also proved popular with risk-sensitive institutional investors such as pension systems. The EU requires UCITS managers to maintain tight risk controls and to provide investors with easier liquidity and more transparency than a typical hedge fund. Indeed, because UCITS investors can typically withdraw on a daily basis, less-liquid strategies such as credit hedge funds are unlikely to form UCITS.

In any case, the roster of known UCITS hedge funds has grown dramatically this year. According to Geneva-based Nara Capital, its UCITS Alternative Index tracked some 500 single-manager funds registered as UCITS at the end of June, up 19% in just three months. There also were 40 multi-manager UCITS vehicles, up 40% in three months.

During the same period, overall assets under management in UCITS funds tracked by Nara rose to €13 billion ($16.8 billion) in single-manager funds and €800 million in funds of funds. Roughly half of the growth reflected in Nara's numbers is from newly launched vehicles, as opposed to existing hedge funds that were restructured as UCITS.

Although originally the domain of European managers, UCITS are now being viewed by an increasing number of U.S. firms as an alternative to domiciling offshore vehicles in lightly regulated jurisdictions such as the Cayman Islands. Since the financial crisis, investors have shown a strong preference for more strictly regulated domiciles.

On the flip side, many U.S. fund managers lose interest in UCITS once they learn about the onerous compliance requirements and trading restrictions involved, market players said.

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