Alternative UCITS: A cost efficient option
There remains a common misperception among some investors that UCITS fund structures are more costly than offshore funds due to additional reporting requirements, frequent NAV calculations and use of derivatives. But as Jason Funk (pictured), a member of the alternative investments business development team at Lyxor Asset Management is quick to point out, alternative UCITS funds are actually quite cost efficient.
“Hedge fund managers are responding to fee compression in the market. We see them launching UCITS funds to reach a completely different investor base. Although they are not always pari passu versions of their offshore strategies, they are being offered to investors at similar and often lower fee levels as managers seek to diversify their investor base. We are always surprised by the misconception of cost that continues with investors. Not only are the management fees often lower, compared to offshore hedge funds, but in some cases feature lower performance fees as well.”
Take Canyon Capital, whose Canyon Credit Strategy Fund, an event-driven credit fund, joined the Lyxor UCITS offering in February 2013. The fund is based on Canyon’s offshore credit and event funds. Whereas the offshore fund continues to use the tried and tested 2/20 fee structure, the UCITS version uses a 1/10 fee structure.
“They are doing this for two reasons: firstly, to offer the strategy to investors unable to invest in offshore funds. Secondly, because under UCITS rules, the fund is a slightly more constrained than the offshore fund; it’s not drawing from the full investment universe afforded in the offshore version,” says Funk.
The investment fund industry is undergoing a trend of convergence currently. Whilst on the one hand, hedge fund managers are doing cost benefit analyses and, where viable, launching UCITS versions of their offshore strategies, on the other hand traditional asset managers are moving away from the long-only universe. They are becoming more hedge fund-like by launching absolute return funds.
And when you consider the size of the UCITS universe, the scale of opportunity available to both traditional and alternative fund managers is huge. Today, alternative UCITS make up a small percentage of the UCITS universe with around EUR155billion in AuM. In contrast, total UCITS AuM is around EUR6.6trillion.
“UCITS funds may not necessarily be the cheapest to set up, but it’s the scale of opportunity that makes them worthwhile,” says Funk.
“With the AIFM Directive coming up, and managers unsure as to how they will be impacted, the UCITS wrapper is a good alternative for them to diversify their client base, both in Europe and beyond.”
The key to whether an alternative UCITS fund is successful, and profitable to the manager, is distribution. With a staff of more than 600 across Europe, managers that partner with Lyxor can be sure that their funds are getting out into the right markets, thus maximising their chances of building assets.
Lyxor’s UCITS single manager offering includes a small, highly reputable cast of external managers: Winton Capital, Canyon Capital, Tiedemann, Caxton Associates and Old Mutual Asset Management.
“All of these managers benefit from our distribution expertise across Europe. It can be difficult for managers to market UCITS effectively. Most do not have the sales teams on the ground needed to successfully market UCITS. We take care of a lot of the footwork in terms of marketing the funds,” says Funk.
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