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James Williams, Hedgeweek

Alternative UCITS platforms grow as regulation tightens

By James Williams – Recent figures released last month by Geneva-based Alix Capital, which runs the UCITS Alternative Index Global, show that in Q1 this year total assets in the alternative UCITS space advanced by 11.6 per cent to EUR155billion. Year-on-year, that’s a 29 per cent increase (EUR139billion in 2012).

As more managers come to market the competition to support them and distribute their products to investors intensifies. Right now, Morgan Stanley’s FundLogic Alternatives platform leads the way with 18 individual funds. But the likes of Deutsche Bank’s DB Platinum platform are proving equally successful; indeed this is now the largest platform in terms of AuA with EUR2.01billion (as at end-2012). Combined, bank-hosted and independent platforms offered 100 single manager products totalling EUR9.6billion last year.

Equity-related strategies experienced a fairly quiet first half of 2012. Stephane Berthet, Head of FundLogic Alternatives, confirms that, as a platform, “we were able to raise assets predominantly in our established funds, although more so towards the end of last year”.

Lower volatility strategies such as event-driven or global macro were preferred by investors because equity risk was too important. This favoured managers such as P. Schoenfeld Asset Management LP (PSAM), whose MS PSAM Global Event UCITS was able to raise a lot of assets, according to Berthet.

“Since Q4 2012, the improvement in market sentiment has meant that investors have become focused again on equity-related strategies. We started to see inflows towards the end of 2012 and this has continued on into 2013,” confirms Berthet. Equity long/short funds with exposure to Asia, such as Indus Capital, have, in particular, enjoyed net inflows.

“For equity-focused managers on the platform, they have raised more than USD250million in assets so far this year,” adds Berthet.

Another fund that has attracted investor capital has been the MS Alkeon UCITS fund, a tech-focused growth fund which, according to Citywire, returned 12.33 per cent in 2012.

On aggregate, the FundLogic Alternatives platform has approximately USD1.4billion in AuA. A further three funds are in the process of being added but as Berthet confirms, “Our goal is not to be a ‘fund supermarket’. We onboard funds selectively as we try to identify gaps in the market. At this stage, we do not intend to have more than 25 to 30 managers on the platform.”

Alceda Fund Management operates the Alceda UCITS Platform (AUP). Since it launched in 2007, total assets on the platform have grown to over USD7billion, making it Europe’s largest independent UCITS platform.

To tap in to growing investor demand for regulated funds, the firm has opened up offices in Hong Kong and London; a market in which Helmut Hohmann, managing director of Alceda Fund Management, sees high potential for asset managers wishing to establish funds with a European passport.

This wider footprint is helping raise the profile of AUP. At the end of May 2013, the firm announced that it had successfully redomiciled the Stafford SICAV – Global Equity Fund for Rasini Fairway Capital, a long-established FoHF, to Luxembourg in a regulated UCITS format. The offshore fund had, until this point, been domiciled in the British Virgin Islands for 20 years.

“We sold all assets that were not UCITS-compliant in order to help them utilise the European passport to leverage broader distribution capabilities across Europe,” explains Hohmann, who continues:

“In addition we have added one global macro fund for managers based in London, as well as funds for two Australian managers. Our global remit is growing and we see a lot of potential for the future.”

Over the last 12 months, Alceda has added a total of 12 managers to its AUP, totalling around EUR700million in net new assets.

Alceda has also recently signed up two major US fund managers – Miller/Howard Investments and Clark Capital Management Group – as it bids to consolidate its position.

Of course, part of the trick for platform success is spotting the right talent. You can have the greatest distribution network in the world, but if the funds aren’t delivering on performance investors aren’t going to register interest.

Both Alceda and Morgan Stanley’s FundLogic Alternatives platform have recently entered strategic partnerships.

Alceda has teamed up with ECPI Group to deliver a series of funds based on the ECPI Global Megatrend Equity Index, moving AUP into the realm of sustainable investments. The idea being that both ECPI and Alceda will collaborate with international investment firms in providing a series of ECPI-related funds based on the “mega-trend” philosophy and each investment firm’s approach.

“There are different strategies we are currently working with spanning equity long/short and long-only, to bonds. One of the first asset managers is Northern Trust. They have a good seed capital pipeline, which we are happy about because we want managers on AUP to build good volume,” says Hohmann.

Morgan Stanley, meanwhile, has teamed up with Equinox Fund Management, a US-based multi-manager that specialises in CTAs, to help onboard a series of differentiated CTA funds. Four funds have been added since October last year: Winton Capital, QIM, Mesirow Financial and Quest.

“We try to add managers that we believe investors want to invest in. It’s important to cross-check investor appetite with people who are used to buying these strategies, which is why we thought it would be useful to leverage Equinox’s expertise; not simply to onboard CTAs, but CTAs that can offer diversification,” explains Berthet.

Winton is a mid- to long-term trend follower, for example, while QIM is the world’s largest non-trend following CTA.

Once the right talent is discovered, platforms will want to see performance come through because with performance comes investor inflows.

“The key thing for us, with all our funds, is performance and something we always work hard on to get right,” states Ian Swallow, Head of UCITS Management at Man.

Man’s GLG European Equity Alternative fund has soft closed, for example, having attracted more than USD1billion in assets.

“Funds likes this have not only delivered short-term performance but are based on a solid strategy and a proven track record; we’ve soft-closed the European Equity Alternative fund in order to protect investor interests and ensure the fund can continue to meet its objectives. Another fund in which we’ve seen strong inflows is our GLG Japan CoreAlpha fund (a long-only strategy led by Stephen Harker). That’s been on the back of strong performance: up +24.49 per cent YTD.”

The GLG Financials fund, up +6.4 per cent YTD, has also received strong inflows.

The net result is that total (including long-only) assets on the Man Group UCITS platform have swelled from USD8.4billion a year ago to USD9.8billion through May 2013.

“We’ve got some additional products lined up for later this summer. The pipeline is looking promising and we’re genuinely excited by the new funds that are scheduled to come on board,” adds Swallow.

Hohmann says that the highest inflows this year have been going to global macro managers and equity long/short managers. The best performer, YTD, has been in the Tideway Global Navigator Fund, managed by London-based Tideway Investment Partners and launched in September 2011. The fund, which invests primarily in fixed income and FX, is up +21.35 per cent over the past 12 months and up around +4.54 per cent YTD.

“We also have a CTA fund – the Amandea Hybrid fund – that has proven successful. It is the best in its peer group and is up +8.78 per cent over the past six months.”

All of this suggests that alternative UCITS platforms are doing a solid job of diversifying the talent available to investors, and enjoying some encouraging performance.

And whilst it is unlikely that growth is likely to abate any time soon, there are more regulations coming in to the UCITS market that will, undoubtedly, make managers’ lives more difficult.

ESMA, for example, has introduced new guidelines that first arose when looking at the use of indices and total return swaps (TRS) in ETF products. These tighter guidelines are now being applied to all UCITS funds and will effectively prevent managers from using customised indices; this is a big concern for those who trade commodities, and who need to rely on TRS to get around the issue of trading physical commodities.

Diversification is one key requirement. For example, a UCITS will not be able to invest in commodity indices that do not consist of different commodities. That means WTI Crude, Brent Crude, Gasoline and Heating Oil would be regarded as all sub-categories of the same commodity. This is not ideal for any manager that trades just energy contracts as part of their investment strategy.

On the issue of using custom indices, paragraph 51 of ESMA’s guidelines reads: “An index should not be considered as being an adequate benchmark of a market if it has been created and calculated on the request of one, or a very limited number of, market participants and according to the specifications of those market participants.”

So no opportunity for customisation.

Index providers will also be prevented from rebalancing the index on an intraday or daily basis and providing a clear transparency on the index methodology and creation to investors.

Andrew Knowles is Senior Vice President at RIMES Technologies, a specialist provider of managed data services including indices and benchmarks. He notes that the buy-side industry has been quite mature in dealing with the index transparency issue, having found solutions with their index providers to show the requisite level of detail, but adds that the index providers still have concerns.

“The big issue is having to put a website link in the fund prospectus to the constituents and security weights of the index being used. Understandably, index providers are concerned at having to provide that level of transparency because it’s their bread and butter. This is all about ESMA and the EU pushing for transparency. That’s what regulators want and that’s what these guidelines are addressing.”

On the customisation point, Knowles adds: “I think this is ESMA basically saying ‘you can’t do that anymore’. A benchmark needs to be exactly that: a well-known, well-defined vanilla index. But this doesn’t just affect hedge fund managers. Take a pension fund needing to prohibit self-investment. They require the index provider to remove their own stock and re-weight the rest of the index accordingly. Does that now mean they can no longer use a UCITS structure because of this customisation of the index?

“There are a lot of practical implications to this point on indexing that ESMA hasn’t fully elaborated on.”

These tighter guidelines suggest that European regulators are getting jittery over the increased adoption of the UCITS wrapper by hedge fund managers.

Adds Knowles: “I think the regulators got concerned when hedge funds moved in to UCITS and started to push the boundaries. They started getting cold feet, fearing what could happen if something went horribly wrong for investors.”

Even though the guidelines are quite tough, they will help bring back investor trust, according to Hohmann: “We always say that form follows function. If the manager needs commodities to make their strategy work we wouldn’t tell them to use a UCITS structure. Rather, we advise clients on alternative options i.e. Luxembourg Part II funds.”

Another stumbling block, which could benefit service providers like RIMES, relates to paragraph 61 of ESMA’s 2012/832 guidelines. This states that a UCITS must ensure that the financial index is subject to “independent valuation”. By whom, exactly, is unclear.

“We would be extremely well placed to provide such a service to asset managers and UCITS fund providers should that be the direction the legislation is to be interpreted. But there was nothing in the first Q&A on this issue, and even when I pushed ESMA they said it would be in the next Q&A,” clarifies Knowles, who adds:

“With the recent index scandals and poor public image of indices, it may be advantageous for fund providers to have their benchmarks and indices valued independently by a third party. We already roll up benchmarks from the constituents upwards and do checks on them so we could easily use a client’s own pricing hierarchy, or one provided by ourselves, to calculate those valuations.

“Anything we can do to remove the burden of the index and benchmark data side of things is clearly of benefit to clients and one less thing for them to worry about in the current regulatory environment.”

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