The Undertakings for Collective Investment in Transferable Securities, or ‘UCITS’, was designed to meet investor demand for well-regulated instruments monitored by improved compliance standards in the areas of investor protection, regulation and disclosure. The demand for UCITS products grew steadily after the financial crisis as UCITS hedge funds are of interest to investors especially during times of market stress. The regulatory bodies of the EU are continually updating and improving upon the product to maintain its relevance to investors, with the UCITS V being the most recent set of regulations implemented.
Despite relatively higher compliance costs, UCITS hedge funds remain attractive to investors and have become hugely successful over the years with the ‘UCITS-compliant’ branding becoming a huge draw for investors. Their attractiveness 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 more European clients and market their funds to clients who are not qualified to invest in sophisticated products.
The implementation of the UCITS IV in mid-2011 repealed the previous UCITS III directive, and provided many enhancements to address pressing concerns from investors. These efforts were much needed during times of market crisis as investors were concerned about the transparency, liquidity, and risk management aspects of their investments. The UCITS IV addressed investor concerns with frequent liquidity, strict requirements to curb fraudulent activities, portfolio concentration limit to curb excessive risk taking and standardized reporting guidelines in risk disclosure and investment objectives, among many others. UCITS V supplements the UCITS IV directive by addressing some of the weaker points regarding investor protection such as in the areas of remuneration, risk-taking behaviour, duties and liabilities of depositories and administrative sanctions, gradually aligning the UCITS and AIFMD directives together.
UCITS hedge funds have maintained a strong pattern of growth in 2014, with the industry delivering modest returns and also attracting plenty of new capital from investors. By the end of 2014, the industry size was at US$263.2 billion managed by a total of 1,038 funds. The UCITS growth trend continued in 2015, with its current size at US$275.7 billion, overseen by a population of 1,041 funds.
In 2007, total assets of the industry stood at US$105.5 billion, managed by 300 funds. Since then, the fund population has grown steadily while the industry assets under management (AUM) have grown by almost three times of its 2007 AUM. The industry’s recovery was especially pronounced after the financial crisis; AUM growth was the largest between 2009 and 2010 with AUM increasing by as much as US$100.7 billion.
Figure 1: Industry growth since 2007
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