While investments in hedge funds have historically been made through offshore fund structures, the past few years have seen the rise of onshore vehicles in a regulatory effort across the globe to better address investors’ concerns of liquidity and transparency.
In Europe, the Ucits Directive has evolved into one of the most widely recognised regulatory frameworks of investment funds, allowing investors to access hedge fund strategies through Ucits compliant onshore structures while obtaining increased transparency and liquidity.
According to Eurekahedge, the alternative Ucits fund universe currently has more than $200bn (£124bn) in assets under management (AUM), which has been growing steadily and fast through the past couple of years. While current yields are at historically low levels, equities exhibit high volatility and passive investment strategies can struggle in range-bound markets, alternative strategies are much less restricted and can profit from ample opportunities in such markets and from decreasing competition.
Consequently, alternative Ucits funds are increasingly used by investors to mitigate losses during market stress periods and to improve the risk-return characteristics of their portfolios. However, while many investors have flocked to these new structures, alternative Ucits funds do have their adversaries, too.
Since this branch of the hedge fund industry is still relatively new, it remains surrounded by myths and doubts, especially with regards to the investment strategies and explicit and implicit costs.
Therefore, it is worthwhile to examine the alternative Ucits universe and to try answering those pressing questions, since the alternative Ucits universe is growing fast, it addresses investor concerns, and more and more hedge fund managers turn to the Ucits framework to launch their regulated fund vehicles increasing the variety of available funds.
Ucits stands for ‘undertakings for collective investment in transferable securities’ and has been developed over the past couple of decades in order to enhance investor protection within the investment fund markets.
The main focus of the directive was on providing a clear definition of allowed instruments, level of liquidity, diversification and transparency.
When the framework first came to fruition in 1985, the main target was traditional funds, which meant that derivatives, for example, could only be used in a limited way – for efficient portfolio management purposes, perhaps.
As markets evolved and products became more complex, the Ucits directive has been enhanced steadily. The latest set of rules, Ucits IV, which came into effect in 2011, has a much broader investment scope allowing a wider range of instruments and also knows much less restrictions regarding the use of derivatives.
This has opened the Ucits framework for the creation of new funds that follow less restricted strategies, so-called alternative Ucits strategies, which allow the implementation of hedge fund strategies.
The regulatory and political focus in Europe and the steady implementation of the various Ucits directives have built a strong reputation, which has turned Ucits into a globally recognised brand of regulated investment funds. As a result, more hedge funds have launched onshore vehicles that are Ucits compliant. The overall Ucits industry is huge with more than 36,000 funds and $6trn in assets across traditional and alternative funds.