Hedge funds in Europe have begun embracing the UCITS III structure to sell their portfolios to a wider base of retail investors and rebuild trust, but shareholder interest groups warn this may be a vast mistake. Transparency of complex structures still does not make an investor well-informed or an investment suitable, they argue.
“UCITS III is a reflection of the wider investment world, and it makes a lot of sense,” Matthew Lamb, head of mutual funds, UK and Middle East, at GAM, told Fund Strategy. “However, there is a danger in squeezing every known hedge fund strategy, particularly those that were offshore and unregulated, into a UCITS III structure. It is important to carefully match the liquidity requirements of the investor with the liquidity of the fund.”
The UCITS III directive requires portfolios to be transparent, liquid and uniformly regulated throughout the EU, three qualities that European investors are particularly interested in, according to the Irish Funds Industry Association. And hedge funds appear eager to regain investor trust and attract additional assets by adhering to the UCITS III directive.
One supporter of hedge funds’ use of UCITS is Mike Warren, investment director at Thames River Capital: “UCITS funds require fortnightly dealing or better. Therefore, it naturally excludes many hedge funds that don’t have that level of liquidity. UCITS funds can’t usually be funds of hedge funds. They can only funds of UCITS III hedge funds, for example. The strategies that tend to go into UCITS funds are more standard absolute-return funds—equity long/short, market-neutral or macro-driven strategies. These can be transacted quite easily.”
Whitechurch Securities Investment Director Gavin Haynes concurs: “The UCITS III structure offers sufficient protection for retail investors. It is about understanding the investment policy, and that fund managers [have] greater scope to back their ideas, rightly or wrongly.”