Tue, 29/07/2014 - 12:16
Market regulation and the desire among investors for regulated alternative funds has proven to be a fantastic opportunity for platform operators, particularly those supporting alternative UCITS.
This asset class, which had its critics a few years back, has grown from strength to strength. Through June this year, assets have climbed to around EUR240bn (according to Alix Capital), up 20 per cent on end of year assets of EUR190bn.
All of which is good news for banks and independent platform providers. But for hedge fund managers considering such a fund, choosing who to partner up with requires careful consideration.
Many will gravitate towards the wider banking arms of their prime brokerage relationships, with Bank of America Merrill Lynch’s MLIS platform, Morgan Stanley’s FundLogic Alternatives plc platform and Deutsche Bank’s DB Platinum platform having grown to become market leaders.
But as Michael Sanders, CEO and Chairman of the Board at Alceda Fund Management SA (part of the Aquila Group) comments, the fact that its Alceda UCITS Platform (AUP) is independent has proven to be its key selling point.
“With us the managers are free to choose their service providers. In addition, if we decide to provide distribution support (based on factors like fund size, manager reputation etc) we help to actively sell the fund and support the manager’s PR initiative.
“We’ve partnered up with a couple of companies globally that can provide global distribution. We introduce a manager’s strategy to our international partners, get feedback on whether it fits in to a particular market and then contact the manager to offer suggestions on how to develop the marketing plan. If the strategy doesn’t fit, we will tell them frankly. We will provide all the platform services but our sales team won’t actively distribute the fund,” says Sanders.
Sanders observes that managers in Latin America and Asia Pacific prefer to work with independent platforms because rather than becoming merely a sub-fund of an umbrella structure, as is the case for bank-owned platforms, they are able to create their own umbrella structure which Alceda then runs on their behalf.
“The advantage here is that the manager can build up his own brand. We only appear in the fund prospectus as the investment management company,” adds Sanders.
The largest fund on AUP currently is the Aquila Capital Risk Parity 7 fund, a multi-asset strategy with EUR282m in AuM.
MLIS platform growth aided by private bank advisory channel
That said, bank-owned platforms are in rude health. The Merrill Lynch Investment Solutions (MLIS) platform launched its first fund back in 2007 with Marshall Wace in the equity market neutral space. The most recent addition, in March 2014, being Sandell Asset Management’s Event-driven strategy: MLIS Castlerigg Equity Event and Arbitrage UCITS fund.
Since 2007, the MLIS platform has grown to USD6.2bn in AuM says Paul Homes, Head of Hedge Fund Distribution at BoAML.
“Our goal is to have a platform offering investment solutions across as wide a range of strategies as is appropriate within the UCITS framework,” says Homes.
Two more funds are planned to launch on the MLIS platform according to Homes. The MLIS Fenician Equity Long-Short UCITS Fund is a tactical trading style fund that will offer investors flexible, low net exposure to the equity markets, with little correlation.
Managed by Corrado Abbattista and Geoffroy Houlot, the strategy combines an active trading approach with fundamental research and macro-economic analysis and employs complementary trading strategies including event driven and special situations opportunities, relative value, pairs and options trading.
“The second fund, MLIS APQ Emerging Markets UCITS Fund, is managed by Bart Turtleboom and Karim Abdel-Motaal. The fund will be a long biased portfolio with allocation flexibility across emerging markets stocks, bonds, currencies and cash, balancing income, capital gains and drawdown control objectives,” says Homes. “After these two launches, we are hoping, subject to the necessary approvals, to launch Discretionary Macro, US Equity Long-Short, Equity Market Neutral and China Equity Long-Short funds by year-end.”
What the MLIS platform is doing is merely a microcosm of the wider trends at work in the alternative UCITS space. What is exciting, as evidenced in the previous comment, is the sheer breadth of strategies coming to market.
Provided their strategies adequately fit within UCITS rules, an increasing number of managers, globally, are looking to diversify their client base and sate investor appetite for alternative regulated solutions at a time when equity and bond markets are at perceived high valuations and cash yields are at historic lows.
“The private bank advisory channel has certainly been one of the key drivers of AUM growth for us in recent times. It is a trend I see continuing for some time to come,” says Homes.
“In Latin America we’ve just started marketing our services. No matter if it’s a family office, an independent financial adviser or a pension fund, they all say the same thing: if they invest into foreign funds they’ve got to be UCITS-compliant,” states Sanders.
Proximity to investors to calibrate the right product offering
Andrew Dreaneen is Head of Schroder GAIA Product & Business Development. One of the UK’s leading asset managers, Schroders’ GAIA platform has witnessed incredible growth in recent times. At the end of 2012, the platform’s AuM was USD1.7bn. By the end of 2013 this had doubled to USD3.4bn and year-to-date assets have again almost doubled to approximately USD6bn according to Dreaneen.
“Not many of the other platforms can point to that level of growth. Our philosophy is one of identifying market demand. If we don’t have the expertise in-house then the GAIA team has the mandate to go out and explore potential partnerships externally and get to market early, like we did with Sirios Capital Partners (in February 2013).
“There are very few US equity long/short managers like Sirios. By having that client-driven approach – many of our clients are mutual fund investors – as your barometer for where demand in the market is, to date has proven to be very successful,” says Dreaneen.
This is where having an asset management business and an existing UCITS distribution network in place lends itself well to supporting alternative UCITS. Schroders is able to tap in directly to what its investors are looking for. Then it’s a case of selecting the best talent (internal or external) to execute the strategy with Dreaneen noting that “we have high conviction in every fund we roll out”.
Such is the demand for getting these funds to market that Schroders is fielding calls from prospective managers every day. Five years ago, the number of managers on Schroders’ short list would have been three or four. Now, says Dreaneen, “we are typically looking at 10 to 15 managers, all of which are interesting. Due to the growth of the ’40 Act liquid alternatives market in the US along with alternative UCITS in Europe, managers can’t afford to ignore (the regulated markets) if they plan to grow their AuM.”
“We can offer managers access to a broad client base of sophisticated investors by having a global distribution footprint. Our GAIA funds are currently sold in over 30 countries, including places where hedge fund managers and most UCITS hedge fund platforms do not have a presence,” says Dreaneen.
For those who don’t wish to be burdened with the ongoing compliance demands of running an alternative UCITS, SuMi TRUST Global Asset Services (GAS) is preparing to roll out its management company service for external hedge fund managers in the UK. This external management company, which appoints the manager as the investment adviser to the UCITS fund, is known as a host Authorised Corporate Director (ACD).
“If managers are intent on tapping into the UK retail market with a UCITS fund, it’s probably more advisable to do so with a UK UCITS. We have a number of clients running Irish UCITS funds, and whilst it is perfectly acceptable to buy an Irish UCITS, the UK retail investor has a preference for UK funds. They are more familiar with them.
“We are now building out our pipeline to support hedge fund managers. There’s been a fair amount of interest; both among managers wishing to launch alternative UCITS funds and those who are looking to change service providers and/or no longer want to have an in-house ACD.
“The UK and Ireland management company model is up and running. The next stage will be to roll that out in Luxembourg,” confirms Guy Mettrick, Head of Regulated Fund Sales Europe at SuMi TRUST GAS.
Ian Swallow is Head of UCITS Management at Man Group. Like the other platforms, it too has experienced significant growth. The platform runs between 35 and 40 UCITS funds, of which approximately 70 per cent are long-only funds. Over the last 12 months the platform has seen its product range grow by 60 per cent to USD6.61bn. Of this, USD4.97bn came from long-only funds and USD1.64bn came from alternative UCITS.
“To the end of June, the year-on-year growth rate for our alternative UCITS range was 62 per cent (USD4.26bn in June ’14 versus USD2.62bn in June ’13). Flows have primarily been into our long-short market neutral equity funds. For example, the UCITS version of our GLG Global Long/Short Equity strategy launched last October and now has in excess of USD500m.
“More recently, we’ve seen steady flows into other new launches in 2014 trading alternative equity and alternative convertible strategies,” says Swallow.
AIFMD – a barrier to future growth?
Despite the meteoric rise in alternative UCITS, one has to consider what potential impact the AIFMD will have on these funds. Whether the same level of AuM growth continues remains to be seen. What is clear, however, is that European investors now have another regulated fund structure that will present a far wider choice of funds than the pre-existing QIF and SIF onshore hedge fund market.
“I see no reason why AIFMD will cause alternative UCITS to disappear. They broadly target two different markets. AIFs will continue to be more of an institutional product, whereas UCITS will continue to have more of a retail focus. I think that will remain the case for some time to come,” opines Swallow.
Indeed, regulation in markets such as Germany is such that institutions can only really invest in UCITS funds with Swallow observing that the vast majority of inflows from German investors go into its UCITS funds “and I don’t think AIFMD will have a drastic impact”.
“Also, a key structural difference between UCITS and AIFs is that the liquidity on UCITS funds is generally superior. If you’re an investor and you want to allocate to an equity long/short strategy that isn’t constrained by UCITS restrictions, why wouldn’t you choose to invest in a more liquid fund structure? In that sense, selecting a UCITS becomes an easy choice,” says Swallow.
The paradox in Europe right now is that managers of AIFs are set to incur higher levels of responsibility than those running UCITS funds, with remuneration rules being a case in point. This is something that is likely to be addressed under UCITS V. Regardless of whether the fund structure is an onshore hedge fund, an offshore hedge fund or a UCITS, Mettrick believes that there will be a long-term future for all three fund vehicles.
”What we are trying to do is to offer our clients a one-stop shop solution for these different fund structures and support them in their business growth,” says Mettrick.
Alceda’s Sanders is confident that alternative UCITS will continue to enjoy AuM growth over the next two to three years. By 2018, managers will have no choice but to sell regulated funds to European investors as national private placement rules get phased out. This will likely support a dual market with alternative UCITS being favoured by retail and private banking clients (and some institutions) and AIFs supporting the more sophisticated end of the investor market. Either way, AIFMD is not an immediate threat.
“Looking ahead, in five or 10 years time I think AIFMD will have the same gold standard that UCITS has today. But right now, UCITS remains the preferred choice, not just for European investors but global investors. If they are forced by financial authorities and regulators to only invest in regulated products then alternative UCITS is a natural market to meet their objectives of generating stable returns with low volatility,” says Sanders.
By way of a final illustration of how this market is maturing, in June Schroders launched the Schroder GAIA Paulson Merger Arbitrage fund and as Dreaneen confirms: “Of all the funds we’ve launched on GAIA, it has been the most successful day one fund in terms of assets raised. It’s an opportunistic time for managers to be considering alternative UCITS. We’re optimistic about the future."
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