Funds of Ucits hedge funds are a recent product development: the Gottex Absolute Return Fund, a multi-strategy product, launched 7 July 2010. As such, few have had the chance to produce eye-popping returns because in the time they’ve existed, the markets have been sluggish. “I think when equity markets improve you’ll find returns starting to pick up and investor interest will grow,” says Chris Hawkins, Managing Director and Portfolio Manager of Gottex Absolute Return (Ucits) Funds.
Alternative Ucits funds are easily understood, regulated, and transparent. Consequently, some investors are allocating directly to managers rather than paying a FoFs adviser to construct portfolios. Such investor complacency creeping into the market is due, in part, to the lure of regular liquidity and the imprimatur that comes with what is viewed by some as a government-approved product.
But as Hawkins points out: “People think of Ucits III as highly liquid funds, but they’re only as liquid as the portfolio of assets they represent. It’s easy to stick a weekly liquidity tag on a fund in benign markets, but we’ve yet to see these portfolios get tested in a situation like ’08 where the ability to liquidate efficiently becomes challenged.”
As the alternative Ucits asset class has grown it has created unwanted elements of risk, principally surrounding liquidity, that retail investors may not understand. “The law of unintended consequences is very powerful in a product like this,” explains Hawkins. “We suspect there’s a lack of recognition of true risk and over-reliance on the stated liquidity terms. We have some concerns that there are funds where the potential of a liquidity mismatch to occur is under-estimated by a proportion of their investor base.”
What FoF providers offer is the ability to manage and understand risk and undertake in-depth due diligence on underlying managers. Hawkins says that when potential new clients are told that the difference in their due diligence of Ucits hedge funds versus offshore hedge funds centres on liquidity issues , eyebrows are often raised. “Understanding liquidity profiles and what the impacts would be in anything other than benign markets takes some skill, particularly in more exotic strategies like credit and arbitrage strategies. We devote a lot of time to this,” confirms Hawkins.
The ability to actively allocate across managers is important. “We’re at the point now where the market is getting saturated and investors are getting confused. The process of being able to research enough funds will become valuable,” notes Hawkins.
Gottex’s own FoUHFs uses a multi-strategy approach, which, in Hawkins’ words, is in keeping with the firm’s culture and philosophy. Since inception it has grown from 10 to 20 underlying managers and currently manages EUR14million in AUM.
The alternative Ucits industry, says Hawkins, has a lot of equity beta. Given that investors who choose to pick funds tend to stick with what they know, it’s understandable why diversification through FoFs can be useful.
“If you own a cross section of the Ucits universe you end up with poor performance. As we’ve seen in May and June, equity beta can hurt you. But if you have exposure to strategies that investors typically don’t tend to be comfortable with, like our multi-strategy fund, you get real benefits of diversification.”
Hawkins confirms that the best performing strategy in the fund’s portfolio, to date, has been credit, providing what he calls a good “volatility dampener”.