US Managers Warming Up to UCITS Funds
European consultants that help managers launch UCITS hedge funds are working with a growing number of U.S. fund operators.
Alceda Fund Management, a Luxembourg shop, recently held talks with two New York hedge fund firms and a Denver commodity-trading advisor that want to set up Undertakings for Collective Investments in Transferable Securities — a tightly regulated European fund structure that has been widely embraced by hedge fund managers in the European Union.
Natixis, meanwhile, expects to sign deals with four U.S. fund operators that would rely on the French investment bank to lay the legal and operational groundwork for UCITS vehicles. And Geneva-based ML Capital is on track to seed 5-6 UCITS funds by yearend, including at least one run by a U.S. manager.
“The UCITS phenomenon is going to take off for U.S. managers simply because they need to expand their distribution base, and because investors in Europe, from institutional to retail, are now embracing the UCITS structure,” said a market player familiar with the UCITS landscape.
UCITS are used by asset managers in Europe to run more than €6 trillion ($8.7 trillion) of mostly long-only investment vehicles such as mutual funds. For years, hedge fund managers were barred from adopting the UCITS structure because of a prohibition on trading derivatives. But that changed with the EU's implementation of the so-called UCITS 3 directive in 2001.
More recently, many of the top European hedge fund shops have set up UCITS in a bid to attract capital from institutional investors that suffered a one-two punch from the 2008 market meltdown and Bernard Madoff fraud. The list of EU-based managers includes Brevan Howard Asset Management, CQS, Man Group, Marshall Wace and Winton Capital.
In the U.S., only a handful of hedge fund firms have ventured into UCITS, including Highbridge Capital, Paulson & Co., P. Schoenfeld Asset Management, Traxis Partners and York Capital. Despite the potential for raising fresh capital from a broad base of European investors, including retail clients, most U.S. managers have been deterred by the substantial regulatory and operational hurdles involved with launching UCITS. Among other things, non-EU managers have to have a physical presence in Europe or partner with a firm that is located there.
That's where advisory shops such as Alceda and ML Capital come in. Alceda landed its first U.S. client last month, signing up ED Capital for an advisory assignment that will see Alceda handle all the necessary paperwork for launching a UCITS fund in Luxembourg. ED would manage the vehicle from its office in New York.
ML Capital not only is pitching managers on outsourced compliance and infrastructure services, but also is offering to sink $15 million to $25 million of seed capital into any UCITS vehicles it helps to launch. The firm seeded its first such vehicle six months ago, when it backed a London manager.
The U.S. firms Natixis is talking to include a commodity manager, a credit specialist and two equity fund operators. The bank expects to have all four deals finalized within six months.
“UCITS are not the ultimate solution, but it's a structure you ought to have in your toolbox,” said a UCITS consultant who advises managers on both sides of the Atlantic. “A good U.S. manager should have a U.S. onshore fund, an offshore fund and a UCITS. When you have that, you can accept any investor.”
European regulators require UCITS vehicles to provide frequent liquidity — twice monthly, at a minimum, versus monthly or even quarterly withdrawal periods for most hedge funds. EU rules also impose strict limits on the use of leverage and require high degrees of disclosure.
Despite the obvious attractions for risk-averse investors such as public pension plans, UCITS hedge funds have raised a relatively small amount of capital to date. Why the hesitancy? “The typical investor in UCITS funds was not accustomed to assessing or buying hedge funds,” according to a recent Moody's report on the hedge fund industry. “Hedge fund managers thus found that their ‘brand power' did not play a major role in the market.”
Still, the pace of fund raising finally appears to be picking up. According to a recent estimate by data provider Hedge Fund Intelligence, UCITS hedge funds have a combined $90 billion of assets under management — triple the year-earlier amount.