Research

2017 Key Trends in UCITS Hedge Funds

Introduction

Since the onset of the global financial crisis, investors worldwide have grown more cautious in undertaking investments and have increased their demands for underlying investment products and instruments to be monitored by international compliance standards. The Undertakings for Collective Investment in Transferable Securities (UCITS) was developed to meet this post-crisis demand, as UCITS embodied by strong regulation resulting to a high level of investors’ protection, with certain restrictions such as liquidity of the underlying assets and leverage caps to provide added transparency to investors.

UCITS funds remain attractive to investors over the years despite the ‘price tag’ of investor protection bundled together with higher compliance costs. The attractiveness of UCITS funds to institutional investors comes from the increased transparency and disclosure of investments, limited leverage and attractive liquidity terms. Managers have also been looking towards the UCITS platform as a passport to access European clients and market their funds to investors across EU market who are not qualified to invest in sophisticated products. The latest regime for the directive, UCITS V, includes enhancements in areas of remuneration policies for UCITS-compliant managers, risk-taking behavior and the duties and liabilities of depositories - to some extent, aligning certain aspects of the UCITS and AIFMD directives together.

Figure 1a: Industry growth since 2007

  UCITS hedge fund industry growth

The UCITS hedge funds industry had humble beginnings with assets under management (AUM) of US$105.5 billion in 2007, managed by 300 funds. However, during the global financial crisis in 2008, performance of UCITS managers were affected and the industry saw AUM declining to more than half compared to the previous year with their asset base contracting by US$51.7 billion. Going into 2009, the AUM of the UCITS hedge fund industry saw strong growth - an increase of twice the levels seen in the previous year, up US$53.3 billion between 2008 and 2009. Indeed, the industry’s recovery is especially pronounced after the crisis with the largest year-on-year AUM growth seen between 2009 and 2010 – AUM increased by as much as US$100.7 billion during this period.

At the height of the Eurozone crisis in 2011, challenging and uncertain times halted the growth of the UCITS industry as assets retreated to US$200.4 billion, down US$5.3 billion compared to the previous year. The industry’s AUM barely changed going into 2012 and was up US$7.3 billion, reaching US$207.7 billion for the year. Nonetheless, except for the slight dip in 2011, AUM for the UCITS hedge fund industry has been growing steadily with the industry managing US$273.6 billion in assets, overseen by 1019 UCITS-compliant funds as of 2017 year-to-date.

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