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Key Trends in UCITS Hedge Funds (April 2020)


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 or ‘UCITS’ was developed to meet this post-crisis demand, as UCITS embodied by strong regulation results in 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 hedge 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 hedge funds to institutional investors comes from the increased transparency and disclosure of investments, limited leverage and attractive liquidity terms. Managers outside Europe 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 behaviour and the duties and liabilities of depositories - to some extent, aligning certain aspects of the UCITS and AIFMD directives together.

Industry growth

The original UCITS directive was implemented back in 1985 with the objective of allowing fund managers within the European Union to operate under the same regulation throughout all member states. The UCITS hedge fund industry started relatively small, with just US$105.5 billion AUM managed by 300 funds by the end of 2007. It was not until after the global financial crisis that UCITS hedge funds gained traction and outpaced their non-UCITS peers in terms of relative growth.

Figure 1: Industry growth since 2007

Despite taking a beating during the financial crisis, UCITS hedge funds nearly recovered their assets under management (AUM) in the following year. The industry AUM grew to US$205.7 billion by the end of 2010, nearly doubling the previous year’s number, indicating the increase of interest among investors who demanded higher transparency and liquidity from fund managers. Industry growth slowed down over the next few years due to the Eurozone crisis, which was not unexpected as a sizeable population of the UCITS hedge funds were solely focused in investing within the European region.

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