Tue, 14/08/2012 - 11:34
By James Williams – It has been an encouraging first six months of 2012 for the alternative UCITS market. A couple of years ago total assets in these products were around EUR80billion. Now, according to Alix Capital, a Geneva-based firm whose UCITS Alternative Index Global tracks performance – and fund inflows – total assets in this space have grown to EUR129billion.
And whilst the USD2.1trillion hedge fund industry has only attracted USD20billion in net inflows for 1H12, Alix Capital notes that ‘Newcits’ have attracted a similar volume, with inflows of EUR9billion recorded in Q2 alone.
Admittedly, it is still a small space by comparison to the offshore market. But these figures suggest that growth is building, slowly but surely.
Some of the better performers in 2012 include the Renaissance Ottoman Fund (Emerging Market), an equity fund managed by Aziz Unan focusing primarily on Turkey, the Middle East and Russia and which is up 21.5 per cent YTD, and the Thames River Global High Yield Bond (Fixed Income), which is up 18.90 per cent. Another notable performer has been the Odey UK Absolute Return fund which, according to the Absolute Hedge database managed by London-based consultancy Kepler Partners, is up 19.3 per cent.
These are all impressive returns but within a wider context it has to be said that alternative UCITS still slightly underperform their hedge fund counterparts: understandable given the leverage limitations under UCITS rules. The UCITS Alternative Index Global is slightly down -0.33 per cent for the year. By comparison, the HFRI composite index for hedge funds is up 1.84 per cent.
Louis Zanolin, co-founder of Alix Capital, observes that the majority of inflows have been going to one or two strategies favoured by investors in today’s volatile market environment: “Inflows have been going mainly to fixed income and macro funds this year; macro has grown by 25 per cent year-on-year.”
One trend that does seem to be developing is the profusion of small sub-EUR50million funds, struggling to raise assets, whilst the very biggest and best managers attract the lion’s share. According to Zanolin, only 4 per cent of alternative UCITS manage more than EUR1billion in assets, whilst only 17 per cent manage over EUR100million.
Much like the offshore world then, the space is highly bifurcated. The big are getting bigger. However, it isn’t just a stellar cast of hedge fund managers that attracting assets. The more traditional asset management houses are proving equally adept, if not more so. Standard Life Investments’ Global Absolute Return Strategies (GARS) fund is now one of the biggest in the space with approximately GBP11.3billion in AUM. Few hedge fund managers come anywhere near that.
One blue chip hedge fund that has had particular success is Man GLG. Speaking with Hedgeweek, Rhodri Mason, Head of UCITS Management Product Structuring at Man Group comments: “The GLG European Equity Alternative, in particular, has been successful; we only launched that for Pierre [Lagrange] last July and we’re already very near capacity having raised USD1billion.”
Continues Mason on the asset raising theme: “I would say nearly all our equity and fixed income long/short funds have done well and many of our long-only funds as well.”
Performance will always be a key driver of a fund’s long-term success. Year-to-date, the GLG European Equity Alternative fund is up almost 5 per cent according to Simon Savage, the fund’s co-manager, leveraging on the core stock picking strengths of the team.
Says Savage, via email: “We have been pleased with the speed of asset raising in the fund. We believe that our long, successful track record in this strategy combined with the benefits of an onshore regulated fund structure have been very attractive to investors. To date the fund has successfully achieved both capital growth and a level of capital protection, and the ability to access those strengths in UCITS format has proved an appealing formula.”
Perhaps unsurprisingly, given the success of SLI’s GARS fund, Jupiter Asset Management decided earlier this year to migrate its three existing hedge funds onshore, and restructure them under the UCITS brand.
Richard Pavry, Jupiter’s head of investment trusts, said that the reasons for moving into a SICAV structure – called the Jupiter Global Fund – were to take the funds to the next level in terms of size by attracting new investors, “as well as to satisfy our existing investors. When Jupiter put the proposal forward it was voted through by 99 per cent of shareholders.
“By moving these funds into a UCITS format we can now market to other institutions. It’s the advised market that we are looking to market to, as opposed to selling directly to the retail market.”
Not that Pavry thinks that all asset management houses are suddenly going to drop their Cayman funds in favour of onshore vehicles: “I don’t think it’s an inexorable trend. With the funds we have this is something that works for Jupiter but it may not necessarily work for other asset managers.”
Interestingly, one such hedge fund manager doing exactly the same is London-based Prodigy Capital Partners, founded by David Robinson (pictured). The firm’s Cayman incorporated Asia & Emerging Markets fund (PFS Prodigy Capital Partners fund) and UK UCITS-compliant counterpart are to be merged into a single Luxembourg SICAV.
This represents the first example of a trans-national merger, but could well be the sign of things to come if hedge fund managers, under AIFMD, decide that it’s no longer cost-efficient to run both offshore and onshore vehicles. Says Robinson: “This is one of the first re-domiciliations of a Cayman fund to Luxembourg. The proposed merger of the UK fund into the SICAV will also be the first one that’s taken place in the UK.”
Robinson confirms that the new UCITS platform will be branded the ‘Boutique Platform’, and will serve as a springboard for external managers to launch their own sub-funds. The platform is due to go live and receive approval from the CSSF any day now and has already got two high quality fund managers ready to join.
“One is a European long/short fund, the other is a US high-yield bond fund. They’re very well known managers so that’s encouraging. Our own emerging markets fund will become the first sub-fund on the platform, ” says Robinson.
The platform will differ from the large banking platforms like Morgan Stanley’s FundLogic Alternatives, and Deutsche Bank’s Platinum by supporting small managers who may already have Cayman funds, or are simply looking to establish UCITS funds but can’t afford the costs involved. To that end, the ‘Boutique Platform’ will offer a turnkey solution to these managers for a flat fee of around EUR25,000. This will cover start-up costs, local fees, directors and auditing. Citi is to be appointed the depositary and custodian, Andbanc the administrator.
“It’s about wanting to give smaller fund managers a chance in what is a brutal world. We want to help, build strength in numbers, and essentially develop a ‘club’ that fosters growth and gives these managers real independence,” adds Robinson. “It’s difficult for smaller shops to raise assets and the only way they see themselves growing AUM is to set up UCITS clones or transfer completely onshore.”
Man Group is an example of a large manager who has decided to properly invest and develop its own UCITS platform. Mason confirms that the platform is seeing good growth and now has over USD10billion in UCITS assets, spread across roughly 35 funds. As mentioned, the GLG European Equity Alternative has enjoyed significant success, particularly amongst institutions. Thanks to the power of brand, Man seems to have bridged the divide between the offshore and onshore markets, offering top-drawer alternative investment strategies on the one hand, and developing a robust distribution network on the other.
“I have to say one of the trends we’re seeing in the industry is a convergence with traditional asset managers. What that means is that some of the things that drive sales and asset raising are more like traditional asset management drivers. We are rightly very conscious of performance in the hedge fund industry but actually what also drives asset raising is the power of brand: quality of distribution network, quality of operating platform and the ability to market and engage with investors.
“To date we’ve been successful because we’re not only selling performance, we’re selling the quality of our governance and risk controls and the amount of resources we’re able to dedicate to our UCITS business.”
Distribution is undoubtedly a key requisite. If a hedge fund manager can partner up with the right platform and develop a strong synergy, the results can be compelling.
According to Gavin Ralston, global head of product at Schroders, the firm’s dedicated UCITS platform, GAIA, has been one of the more successful platforms. Last year the platform onboarded credit giant CQS’s credit fund – named the Schroder GAIA CQS Credit fund – joining two other London-based luminaries, Sloane Robinson and Egerton Capital. The platform also houses two internal Schroder funds.
Confirms Ralston: “I think I’m right in saying that we’ve raised the highest assets per manager of any of the platforms. That’s testimony to the fact that we put the full weight of Schroders’ distribution machine behind each fund. We treat every external fund as if it were one of our own internal funds. We ask that every manager gives us USD1billion of capacity to ensure there’s good commercial potential both for the manager and for us.”
CQS has enjoyed particular success since it launched last year, with Ralston stating that “jointly we’ve done a good job raising assets. It’s now at USD600million.”
Total assets on GAIA are roughly USD1.5billion. Net inflows through June this year are USD400million, much of which is European wholesale investor capital coming from the UK and Switzerland.
When asked what Prodigy’s Robinson hopes to achieve with the new platform within the next 12 months, he says: “We are aiming to launch two sub-funds within Q32012. Our aim is to then launch one or two funds each quarter all the way through next year. We hope to have a total AUM of between EUR200million and EUR500million by the end of 2013.” As well as the two external managers already confirmed, Robinson is also in discussions with two further managers.
Clearly, there’s no lack of desire for hedge fund managers to launch UCITS vehicles. After all, it opens up an entirely different investor base, as CQS is discovering. But Ralston makes an interesting point by saying that some high quality managers are still reluctant to commit to the liquidity terms that UCITS requires.
“I think their concern is that if the UCITS fund has better liquidity terms than their offshore fund, there will be some cannibalisation (that is, assets being liquidated in the Cayman fund and re-invested in the UCITS) but it’s not something we’ve seen with the external managers on GAIA.”
Ultimately, UCITS represents an additional funding channel for managers. Throw the AIFMD-compliant QIF/SIF structures into the mix, and it seems plausible that going forward, rather than Cayman suffering, managers will consider all three investment structures to achieve truly global distribution.
Mason confirms that Man already has five or six funds that have been structured appropriately to target specific investor groups. The GLG European Equity Alternative fund is a great example of where the firm has taken a successful strategy, first launched as a Cayman vehicle, and subsequently developed a US master/feeder fund for US investors, and a UCITS fund for global investors ex-US. Each one of these structures aims to run pari passu. So could a QIF become the fourth leg, as it were, to target European institutions who may not need full daily liquidity under a UCITS structure?
“That’s interesting. Under AIFMD managers may say to clients ‘We’re at capacity in our UCITS fund but would you be interested in looking at an alternative EU-regulated structure?’ It would definitely be something that the industry could look at,” says Mason.
Adds Zanolin: “Liquid strategies that can be implemented in a UCITS structure will over time be increasingly offered – those that aren’t will either remain offshore or become QIFs.”
In conclusion, Ralston states that the key to being successful is the amount of “distribution bandwidth” given to funds on the platform.
“We put all the operational structure in place for the manager, but more than that we offer a strong sales push. I think if you talk to the managers on our platform they would recognise that as something we brought to them.”
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