The adoption of the Ucits III structure and changes to UK tax law have provided an attractive opportunity for many offshore hedge funds to launch UK onshore, regulated funds allowing managers to imple
The adoption of the Ucits III structure and changes to UK tax law have provided an attractive opportunity for many offshore hedge funds to launch UK onshore, regulated funds allowing managers to implement broader investment strategies within a more transparent framework.
GAM has long enjoyed an international reputation as a manager of funds of hedge funds, but it also has longstanding expertise in single-manager hedge funds, so it was a natural progression to offer hedge funds to a wider client base under a Ucits structure.
In September, GAM took advantage of the flexibility of the Ucits structure when it converted an existing hedge fund run by Ross Hollyman into a daily dealing long/short Ucits III vehicle. Offerings like this one distinguish GAM, since its managers have the potential to add value on the short side with an absolute return mindset.
Other managers seeking to take advantage of the flexibility of Ucits III come from the long-only side of the industry and retain its focus on benchmarks and weightings. As a rule, they have sought to deliver absolute returns by adding a short selling overlay to their established long-only skills.
Perhaps not surprisingly, some of these managers have struggled to protect investors’ capital amid the market turbulence of recent months. While 130/30 funds have attracted considerable attention over the past few years, in practice they have tended to deliver lower returns in rising equity markets than long-only products, but provide less protection from volatility in difficult times than hedge funds.
There will always be a place for active long-only managers, as well as for low-cost exchange-traded funds that track indices, but the future is less certain for closet index-trackers that charge active management fees. By contrast, under Ucits III investors can enjoy access to regulated, liquid and tax-efficient funds from genuine hedge fund specialists with a proven track record in delivering absolute returns and protecting capital in all market conditions.
Traditionally, a series of obstacles have stood in the way of broader investment in hedge funds in the UK, including esoteric strategies that may be hard for investors to grasp, the illiquidity of many offshore vehicles that deal monthly or even quarterly, and the level of fees and costs, with 2-and-20 per cent established as the standard formula for annual management and performance fees.
In addition, offshore hedge funds are suffering an added disadvantage following recent changes to the UK’s capital gains tax rules. When both income and capital gains were taxed in the UK at up to 40 per cent, offshore funds that did not qualify for capital gains tax (CGT) treatment were not at a significant disadvantage to their regulated counterparts, but this is no longer the case since the standard rate of CGT was reduced to 18 per cent early this year.
For managers who feel comfortable with the dealing requirement of the directive, Ucits III offers the ability to use many of the techniques employed by offshore hedge funds in a structure that can be marketed throughout the EU combined with efficient tax treatment.
Of course, not all hedge fund strategies are suitable for conversion into Ucits III structures. Asset managers should not squeeze their investment process into a Ucits framework if it would constrain the manager’s ability to make money. In creating Ucits funds, GAM is able to provide true exposure to hedge fund strategies to investors, while remaining true to its heritage.
Matthew Lamb is head of Middle East wholesale and institutional clients at GAM
