JOY DUNBAR, EDITOR, ABSOLUTE UCITS
As the alternative UCITS universe matures, it has increasingly
become an embedded feature of the alternative investment
landscape. At the same time, institutional and retail investors
are facing an evolving set of challenges and are finding
themselves caught between a rock and a hard place.
Stagnant economies, European sovereign debt crises and
uncertainty over the future of the euro have created a storm
cloud that looms over the heads of investors and the asset
The number of new fund launches has slumped to new lows as
asset managers cancel or delay alternative UCITS new
strategies. In 2012, only 62 alternative UCITS-compliant
strategies were unveiled, raising assets of $1.7 billion. This
contrasts sharply with 2010, a peak year during which 129 funds
raised $9.5 billion of new alternative UCITS assets.
These measures have enabled financial markets to avoid a major
financial crash and prevented a disastrous systemic banking
failure. To some degree, confidence has returned to the economy
and, albeit weakly, to end-investors.
Governmental and central bank intervention in the key economies
has come to characterise the global economic landscape. In the
UK, the authorities have pumped enormous volumes of money into
the economy with a policy of quantitative easing. In the
Eurozone, as well, the European Central Bank has pursued a
number of policy measures to do 'whatever it takes' to save the
euro, including the implementation of long-term refinancing
operations and the introduction of the Outright Monetary
Transactions (OMT) initiative last year.
Widespread monetary intervention is symptomatic of the
challenging macro-economic environment in which the long time
period of constructing classical investment portfolios -
comprising equities, gilts and cash - is well and truly
Investors are hunting for income, yield and alpha while they
face the problem of dealing with the consequences of inflation
eating into their savings - especially if they choose to do
nothing. Moreover, the hunt takes on a greater urgency during a
period of low interest rates and the looming threat from the
Bank of England's monetary policy committee, which is
considering the adoption of negative interest rates in an
attempt to force banks to increase their lending. This policy
is already in place in countries such as Switzerland, Sweden
and Denmark, which have employed this strategy in the last few
Since the current investment environment compels investors
to take some degree of risk in order to generate returns,
diversifying their investments has emerged as a key aspect in
their drive to achieve a better total return.
While investors will continue to diversify away from long/short
equity strategies that are perceived by some players to be
expensive beta plays, there are nevertheless some notable
exceptions in the long/short space.
Niche and nimble equity UCITS-compliant hedge funds with
limited capacity, such as Majedie Asset Management Tortoise
Fund, Prusik Asian Equity Income Fund and CF Odey UK Absolute
Return Fund, are continuing to flourish. All these funds have a
strong reputation for achieving alpha.
Although investors are showing signs of returning to equity
markets, it is not clear whether long/short equity UCITS fund
will benefit. But areas like mixed arbitrage and
multi-strategy, global tactical asset allocation and other
diversified strategies are set to attract greater asset
The increase in the number of multi-asset funds is
particularly a response to investor demands for diversifying
away from traditional investing; many of these portfolios
employ alternative UCITS along with other asset classes. Also,
hedge fund managers use alternative UCITS funds as either a
cash management or liquidity tool.
Even though equity markets were largely positive last year,
the need for investors to achieve downward protection while
generating alpha is increasingly at the forefront of their
Despite the volatile environment, the Absolute UCITS Single
Manager Composite Index showed a return of 4% in 2012. Although
this result ought to encourage further growth in the sector,
performance still needs to improve for investors to increase
their allocation to alternative UCITS.
For institutional and retail investors, the uncertain
environment means that assets in the alternative UCITS sector
At December 2012, there were a total of 480 UCITS-compliant
alternative investment funds in the Absolute UCITS database,
with $147 billion of assets under management.
At the same point at the end of 2011, the sector had $113
billion in assets under management with 479 funds. However,
excluding the $34.3 billion Standard Life Investments' Global
Absolute Returns Strategies portfolio, the industry had grown
from $93 billion at the end of 2011 to $113 billion by the end
of last year.
GROWTH OUTSIDE THE EUROPEAN UNION
Fund managers based in the US, the largest hedge fund industry
in the world, continue to launch UCITS-compliant funds,
providing their strategy is compatible with the framework. Most
US hedge fund managers tend to unveil their UCITS-compliant
strategies in partnership with a European-based platform.
A recent trend whereby niche alpha generators are teaming up
with larger asset managers to leverage their respective areas
of expertise continues to gather steam. For example, GAM has
recently purchased a 30% stake in the Connecticut-based, macro
specialist alternatives manager, QFS Asset Management. Now that
the partnership has been formally agreed, a new alternative
UCITS strategy will be launched within the GAM Star range. QFS
also has a currency portfolio on the MLIS (Bank of America
Merrill Lynch) platform.
One of the main advantages offered by the UCITS Directive is
the cross-border passport facility, which attracts fund
managers as well as investors from outside the EU. Swiss
private banks, for instance, have embraced the framework on
behalf of their high-net-worth investors.
The passport concept has also attracted widespread interest
throughout the fragmented Asian asset management industry and,
with the opening up of mainland China, the alternative UCITS
sector may well prove capable of capturing new sources of
THE FUTURE: PRODUCT INNOVATION?
In developed countries, where economic growth has been low by
historical standards, the alternative asset management industry
is responding to changing social, demographic and economic
According to the UCITS VI consultation, which was published
in 2012, the UCITS Directive could potentially expand its brief
in the future by encompassing less liquid strategies such as
property, infrastructure, and loans - as well as direct
investments in commodities.
Currently, alternative UCITS-compliant strategies often
involve complex investment techniques which would not be
feasible without the use of derivative instruments since this
ensures that they retain their liquidity requirements.
The response by the European Fund and Asset Management
Association (EFAMA) to the European Commission's consultation
noted: "Despite the complexity lying behind individual
techniques, these products have been designed with a view to
answering a clear demand from retail investors, often with the
aim of reducing volatility and smoothing investor's returns,
leading to reduced investment risks."
In addition, the association points out that if strategies
were regulated away from the UCITS framework, retail investors
would seek other less regulated products.
EFAMA has also recommended that either a new name or a brand
be incorporated into the UCITS Directive for retail funds that
will make a distinction for long-term investments.
Meanwhile, a number of additional regulatory changes to the
European asset management industry have been implemented. These
include the UCITS V consultation, which brings the UCITS
Directive into line with the Alternative Investment Fund
Managers Directive (AIFMD).