James Williams, Hedgeweek

Hendry’s Eclectica Absolute Macro fund has a confused identity… UCITS master-feeder structures gaining traction says law firm William Fry…

Analysts at London-based Kepler Partners, whose research on UCITS funds is presented on the website Absolutehedge.com, have concluded that the UCITS version of Hugh Hendry’s Eclectica Absolute Macro fund has been a bit of a mixed bag.

Having only produced one strong period of performance (2011) since the UCITS fund launched in 2009, Kepler Partners awarded the fund three stars out of five. The problem seems to be the fund’s ability to generate all weather returns. Although the offshore hedge fund has generated 8.4 per cent annualised returns since 2002, helped by higher volatility, the volatility in the UCITS fund has been much lower, producing annualised returns of 3.6 per cent. “Given the more restrictive UCITS regulations we expect this [lower volatility] to remain the case going forward,” analyst Georg Reutter was quoted as saying.   

Reutter added: “In our opinion, investors in this fund need a degree of patience (long investment time horizon) and although risk management rules should prevent drawdowns they are also likely to reduce future returns. In our opinion this has led to a confused identity for the Ucits fund and we will looked to see evidence of more consistent returns or strong tail protection before considering upgrading.”
 
UCITS funds suffered record net outflows of EUR65billion in June, compared to net inflows of EUR34billion in May reported the European Fund and Asset Management Association (EFAMA) this week in its latest Investment Fund Industry Fact Sheet. It notes that the EUR65billion of outflows in June was the largest such event since October 2008. The reason for this figure is due to large-scale redemptions from fixed income funds, in anticipation of interest rises in the US and the Fed’s expected ‘tapering’ initiative to reduce monthly bond purchases.
 
Equity funds were also negatively impacted.
 
Net sales of equity funds increased net outflows to EUR9billion, up from EUR1billion in May, while bond funds registered net outflows of EUR18billion in June. Money market funds saw a wide swing in sentiment, suffering EUR40billion of net outflows compared to only EUR5billion in May. The net result was that total net assets decreased by 3.7 per cent in June to EUR6.559trillion. Bernard Delbecque, Director of Economics and Research at EFAMA, commented on the figures by saying: “Rising long-term interest rates and market expectation that the Federal Reserve will begin tapering its quantitative easing programme before the end of this year fuelled large withdrawals from bond funds in June, and also negatively impacted equity funds.”
 
UCITS master-feeder fund structures are gaining traction according to Irish law firm William Fry, as European asset managers use feeder funds to gather assets in individual EU member states. They note that a UCITS master-feeder structure has the following specific features:

  • A minimum of 85 per cent of the assets of the feeder UCITS must be invested in the master UCITS 
  • The master UCITS may neither itself be a feeder UCITS nor invest into a feeder UCITS 
  • There must be an agreement between the master and the feeder UCITS or internal conduct of business rules where the UCITS have the same manager. 
  • If the master and feeder UCITS do not share common depositaries and/or auditors, information sharing agreement(s) must be entered into between the relevant parties.

They note that the master-feeder structure is subject to the authorisation of the feeder’s home regulator only. If the master and feeder are domiciled in different jurisdictions the only role played by the regulator of the master fund is to confirm that it complies with the investment restriction pertaining to UCITS.
 
One of the benefits of having a UCITS IV master-feeder structure is distribution. As William Fry writes on its website: “A feeder can be established in an EU member state that suits the particular requirements of the distributor in that jurisdiction. The structure is also useful from a branding perspective as the feeder fund can be named according to the preference of the fund promoter or distributor while following the same investment policies as the other feeders in the master-feeder structure.
 
Master-feeder structures also offer significant potential to penetrate pensions markets as feeder funds can be adapted to meet a range of local tax and regulatory reporting requirements.”

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