Make no mistake about it: UCITS (Undertakings for Collective Investment in Transferable Securities) are not going anywhere. They are here to stay!
Thanks to European fiat, essentially directives from the Alternative Investment Fund Managers (AIFM) and EU regulatory bodies, any and all non-European based funds NEED TO BE “registered” and “regulated” by European authorities if they are to be freely marketd to EU investors. This broad ruling–effective from July 22nd, 2014–is especially targeted at US funds, largely the offshore variety ( Cayman, BVI, Bermuda, et al).
CAVEAT EMPTOR FOR THE SOPHISTICATED
While the focus of this series of EU rulings is mainly aimed at and for the benefit of sophisticated private Investors, family offices and HNW clients at private banks, etc., this focus obliges greater transparency, including divulging fund leverage, fuller disclosure and offering, at least, fortnightly liquidity in an effort to “level the playing field” with institutional clients. For those large and sophisticated entities, “Caveat Emptor” carries the day. Large investors (pension funds, insurance companies, etc.) clearly invest how and where they want.
Luxembourg and Ireland UCITS funds, registered either singularly or on investment platforms (the latter offering distinct “capital gains” tax advantages in moving between the same platform based funds) are largely, but not exclusively concentrated in either Luxembourg (deemed to be “home” to over 50% of the European UCITS total) or Ireland (at around 35%). There are a number of other valid country jurisdictions (like France, England and Malta), but most hedge fund and “long only” managers opt for the Lux or Irish solutions, largely for ease of access, competent administrators, language fluidity and helpful regulatory authorities.
Alternative Investment Funds (AIF’s) or, dependent on the jurisdiction, Qualified Investments Funds (QIF’s) can fulfill the AIFM Directives fully. However, an alternative method, “Reverse Solicitation” (RS) can be appropriate, but ONLY if appropriately documented before the aforementioned July 22nd, 2014 date. RS means that an investor and a fund
have been in previous contact and that this documented “contact” allows the subsequent follow on solicitation. Many of the world’s largest funds use this tactic and/or, in some cases, a fully AIFMD compliant fund to cover client outreach.
GROWING POPULARITY
All manner of statistics confirm the rapid growth of UCITS (an excellent source of statistical “slicing and dicing” updates is done by the scholarly and informative “Hedge Fund Journal” in its regular reviews on the hedge fund industry). But anecdotally, part of a recent conversation had with a Managing Director at a major US investment bank (also, self-servingly, a significant “prime broker” to the industry) proffered that: in each and every weekly in-house MD meeting, the UCITS subject not only comes up, but with full expectations that the UCITS universe will treble in 2015 alone!
Additionally, another strong “selling point” for the promulgation of UCITS funds is that they are increasingly becoming the accepted “Global Standard”. Regulatory authorities from disparate countries like Hong Kong and Singapore all the way to certain Latin and South American ones give the regulated UCITS products their “imprimatur”.
VOLUME-WISE
By year end 2014 there were over 1000 UCITS funds on record totalling some nearly $300 billion.
SIZE MATTERS
While UCITS offerings can be launched at virtually any size, it is generally deemed to be at a financial “break even cost point” broadly between Euro 15-25 million. However, for liquidity and general financial viability, funds should launch with AT LEAST that referenced amount, aiming quickly to get to the Euro 50-100 million range.
WHOM YOU WORK WITH ALSO MATTERS
A number of large investment and merchant banks in Europe see UCITS as an exciting and potentially lucrative business. Selective European behemoths like SocGen (Lyxor) and Deustche Bank (DB Select) offer a competent, but often expensive option. Smaller platforms–like The Independent UCITS Platform–can be just as effective as the Big Boys, but at a fraction of their cost.
TARGET STRATEGIES
UCITS strategies often mimic those most popular in either US “on or offshore” jurisdictions. But choices, differing costs and access to the full investment product gamut limit some opportunities (For example: UCITS CTA’s must utiilize either swaps or a structured note to gain commodity exposure).
European investors PRESENTLY favor; Equity L/S, Global Macro, CTA’s and Fixed Income (with convertible bond strategies being an ever growing subset). Overall and historically, Fixed Income remains the largest UCITS segment.
TWO FURTHER NOTES
While for our North American friends it can be difficult to get their “heads around” the UCITS concept, it is somewhat analogous to the growing 40 ACT sector in the USA, as a reference point.
And, lastly, in its own inimitable fashion, Switzerland is now mandating a roughly UCITS-like approach to funds represented and marketed within its borders from March 1st, 2015. Why? “Because it can” is the facile answer. But protection of both its large hedge fund investor base and its reputation would be the more accurate response!
Written by John Gallagher