One of the key developments in 2009 has been the surge of interest in the UCITS III framework among alternative investment managers. Against the backdrop of the global recession and some major financial scandals, there have been increasingly vocal demands for greater transparency, risk management and regulations for hedge funds. In this situation, an increasing number of managers have started looking at the UCITS III platform as a way to not only meet the requirements of existing investors but also to market their funds to new clients who have traditionally been sceptical about, or unable to, invest in unregulated products while at the same time, utilise their unique alpha-generating strategies.
Since last year, Eurekahedge has been closely monitoring this new class of alternative vehicle and is currently tracking 400 UCITS hedge funds1 in its database. The 2009 returns of the Eurekahedge UCITS III Hedge Funds Index (beta version) stand at a healthy 14.1%. Additionally, according to our estimates, there were 97 new UCITS III-compliant hedge funds launched during the year, bringing the total size of the sector to US$52 billion.
Overview of UCITS III Hedge Funds Industry
UCITS, which is an acronym for Undertakings for Collective Investments in Transferable Securities, is a set of directives passed by the European Union member states to allow cross-border investments as a step towards financial services uniformity. The original regulation was later upgraded to expand the range of activities that management companies are allowed to undertake and to include more asset classes and a broader range of derivative instruments. The expanded range of products and instruments that managers can use makes the UCITS III framework quite adaptable to various hedge fund strategies.
Although the UCITS III directive has been in effect since the early 2000s and has been amended to include various new financial instruments over the years, it was only recently (due to the financial crisis) that major players in the alternative investment community have started showing greater interest in this sector. In reality, UCITS III provides the middle ground between hedge fund managers, who are constantly looking to use non-traditional strategies, and investors, who are looking for greater risk management, transparency and liquidity.
The salient feature attracting hedge fund managers is the ability to use their preferred investment techniques in a regulated environment, which, in turn, helps them market their fund to new pools of capital and satisfy the demands of their current investors. The strategies available to managers include…
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1 Currently, there are 249 funds listed in the Eurekahedge database and we are in the process of collecting information from 141 UCITS III hedge funds.