By James Williams – The alternatives industry is today experiencing a paradigm shift. Long the preserve of ultra wealthy individuals and family offices, hedge funds are undergoing a cloning exercise, with managers offering onshore vehicles to appeal to a wider investor base.
There are now in excess of 400 alternative Ucits and the universe keeps on growing, with recent surveys indicating that over 100 hedge fund managers are considering launching Ucits products.
“The growth rate in alternative Ucits is going to remain substantial for at least the next two or three years. That for me is very clear,” says Eric Bertrand (pictured), Director of Schroder GAIA, the firm’s Ucits platform.
Broadly speaking, most managers choosing to launch a Ucits do so either on a banking platform or on an independent platform such as GAIA. “The objective of GAIA is not to be like an investment banking platform,” adds Bertrand. “We want to offer a limited number of products that are packaged and feel the same as any other Schroders products and also avoid duplications of strategies.”
BAML’s Ucits platform, MLIS (Merrill Lynch Investment Solutions), is currently the industry leader, managing USD2.3billion in AUM. The firm saw alternative Ucits developing as a trend three to four years ago following the 2002 introduction of Ucits III. “To take alternative strategies and put them in a regulated wrapper was an idea we felt would really take off and it has. By the end of 2011 our target is to be approaching USD3-4billion in AUM,” explains Miriam Muller, Head of MLIS.
This is slightly less than the USD5billion that MLIS targeted at the start of 2011. Muller says the reason for this is that when new funds are launched, investors will wait to see how it performs, adding that “in the early stages we find asset raising can be on the slower side”.
The quality of fund managers joining platforms like MLIS illustrates the extent to which this asset class is maturing. Already this year, Och-Ziff, AQR and Graham Capital have joined MLIS, whilst Paulson & Co and Traxis Partners have joined Deutsche Bank’s Platinum platform.
Currently, 13 funds are available for investment on MLIS. Muller confirms that a further four managers are due to launch: two sector funds (financial, sustainable resources), a merger arbitrage fund and a US equity l/s fund. “In the pipeline we have five more managers at various stages of onboarding including: liquid emerging credit, liquid distressed debt, commodity equities and an FX fund,” explains Muller.
Despite the size and scale of banking platforms, George Cadbury, Director of Asset Management at Merchant Capital, which runs an independent platform, emphasises that they’re not trying to compete with the banks, just provide something different. “We offer an open-architecture structure and aim to combine the independence sought after by the manager with quality infrastructure support to allow scalability,” says Cadbury.
Full service administrators like BNY Mellon are starting to profit as front to back office support for “newcits” accelerates. “BNY Mellon generates a significant revenue stream from these funds through our presence in the key Ucits domiciles of Ireland and Luxembourg,” explains Mark Mannion, head of relationship management EMEA, BNY Mellon Alternative Investment Services. As well as offering a portfolio management system which provides real-time performance data to clients, Mannion says they also provide the options to outsource mid-office functions “such as trade matching and confirmation, settlement and collateral management”.
“The sector will continue to evolve with product innovation increasing the number of hedge fund strategies that can be accommodated within a Ucits structure,” adds Mannion. Muller concurs, stating: “Certainly, we do, we always have and we continue to see this as a sector with a future.”
Matrix Asset Management has been running alternatives Ucits since August last year when it rolled out the Matrix Asia Ucits, managed by Rupert Foster. It now has three funds on its platform, having last week launched the New Europe Ucits fund. The other fund – Lazard Opportunities Fund – was launched last October. “We have a simple strategy: where we see demand, and where we have the in-house capability, we’ll produce products like the New Europe fund. For those clients looking for strategies, which we don’t manufacture in-house, we look to partner with other managers. We don’t manage convertible bonds in Matrix and are delighted to partner with Lazard,” explains the firm’s CEO of asset management, Angus Woolhouse.
Matrix’s clients, says Woolhouse, have a clear preference for absolute return funds with a stable profile and a flexibility for a manager to deliver returns whether the markets are going up or down. They listen to what their clients want.
In their recent Ucits barometer study, ML Capital found that 49 per cent of investors surveyed wanted exposure to US equity l/s managers. This is a clear trend and one that MLIS, as part of BAML, is able to act upon perhaps more effectively than others. “Certainly many of the managers we’re working with are US-based. That continues to be the trend for us. Of those in the pipeline, only one is not US-based,” says Muller.
Schroders have a mix of internal and external funds on GAIA. Egerton Capital, CQS and Sloane Robinson each have Ucits on the platform, whilst GAIA Opus Multi-Strategy, a Ucits fund of hedge funds, is managed by Schroders New Finance. “We have another internal fund that’s still in the seeding stage called QEP, a quant-managed equity market neutral fund,” says Bertrand. “Next year we have plans to roll out more internally managed funds, perhaps one to three funds over the next 18 months. But external managers will remain the driving force for some time.”
With USD69.1billion in AUM, Man-GLG is the world’s largest hedge fund manager. The majority of its Ucits are long only, with 10 alternative Ucits in the GLG range, and four or five in Man. Last month, the firm launched its first joint alternative Ucits: Man-GLG Multi-Strategy fund. “We’re positioning it as a best-of-breed product across the alternative Ucits offering within Man-GLG, we think this is going to be a major initiative for us,” explains Rhodri Mason, Head of Ucits Management, Man Group. “Not only can it allocate to our existing funds but it has the flexibility to allocate to any future alternative Ucits we launch as well.”
Branding is a key exercise for hedge fund managers looking to raise assets for these funds. Competing with the likes of Schroders and Man-GLG is no easy task.
Schroders’ GAIA Egerton fund has already reached USD500million, whilst three of GLG’s funds are above USD500million. “These are Man AHL Trend, GLG Alpha Select Alternative and GLG European Alpha Alternative, which has now passed the USD1billion mark. Several more have hit USD100million,” adds Mason.
Mason believes that to succeed in this sector, you need to be able to do two things: firstly, you’ve got to have solid alternative investment management capability. Secondly, you need an industrial-strength operating and distribution platform that can handle additional risk controls around Ucits and offer a brand that retail investors will recognise. “There aren’t many that can point to doing both well and that’s why Man-GLG is so well positioned. That’s the key to unlocking success in the alternative Ucits space,” notes Mason.
Skyline Capital Management, established by Geoff Bamber and Vernon West last year, recently launched a global emerging market l/s Ucits on ML Capital’s MontLake platform. On branding, Skyline CEO Vernon West comments: “It gets you noticed: for an early stage manager it’s necessary but not sufficient to secure inflows. Once you’re on the radar it’s all about performance. As a hungry, focused emerging manager, Skyline expects to outperform its peer group over time.”
On asset raising, Matrix AM’s Woolhouse says: “It has been difficult for everyone, but we’ve raised assets ahead of our expectations and we are hopeful of doubling assets by the end of this year.”
Issues remain over the performance of these “Newcits”. “The market environment is difficult. I’m surprised about macro (-0.31 per cent) and CTA as well (-1.51 per cent), although fixed income funds are holding their ground (+1.32 per cent). Most of the commodity funds with a directional bias are suffering although they had a good run at the start of 2011,” comments Louis Zanolin, whose firm Alix Capital generates the Ucits Alternative Index. “I’m surprised at the dispersion of returns. Some are doing okay but the majority are quite weak. It’s a strange environment.”
“With respect to the Asia Ucits, May was difficult for us and the whole industry. We target 10 to 12 per cent net return on behalf of our investors and we’re a little off that so far this year. China has been sold off aggressively by the marketplace and it was our largest single country exposure so we were disproportionately affected by that sell-off,” adds Woolhouse.
Tracking errors are inevitable with Ucits and certainly impact on performance, to some extent. “There’s no issue having differences between portfolios of a flagship and Ucits provided those differences are clearly articulated,” comments Bertrand.
He confirms that the performance between the Egerton Ucits and its offshore flagship is very satisfactory and expects the same for the CQS fund over time. “For Sloane Robinson we expect the tracking error to be slightly wider than for Egerton. A small part of its flagship portfolio in emerging markets is invested in smaller, less liquid stocks.”
With everyone waiting for a blow-up, platforms like Merchant are taking significant steps to ensure they remain “one of the most technologically advanced and controlled” according to Cadbury. One such development is the employment of a pre-trade compliance system, an automated traffic light system informing managers whether impending trades are Ucits compliant or not. “Pre-trade compliance will soon become an integral part of the industry in reducing susceptibility to a blow-up,” says Cadbury.
“There’s a place in investors’ portfolios for the full range of products,” concludes Muller. “I think there’s a confluence of long-only funds versus alternative investments and with our alternative Ucits products we’re seeking to fill this niche.”