UCITS hedge funds are typically more volatile and underperform their non-UCITS hedge fund rivals, according to a comparative study by the Edhec-Risk Institute.
The findings also show that the domicile of a fund is an important indicator of a fund’s likely performance with European domiciled funds delivering lower risk-adjusted returns compared to funds domiciled in other regions.
Noël Amenc (pictured), director of Edhec-Risk Institute, says: “Investors are increasingly considering hedge funds as part of their investment universe, but are also searching for access to sophisticated risk management techniques within the regulated and transparent world of mutual fund products. We are delighted that this study supported by Newedge has been able to shed light on the way in which techniques are converging in the mutual fund and hedge fund universes and we think that the research will be of particular interest to institutional investors.”
Other conclusions found in the report, which can be downloaded at Edhec-Risk Publication Convergence Mainstream and Alternative Asset Management, include:
• UCITS hedge funds underperform non-UCITS hedge funds on a total and risk-adjusted basis. However, UCITS hedge funds have more favourable liquidity terms and when liquidity matched groups of UCITS hedge funds and non-UCITS hedge funds are compared, their performance seems to converge.
• There is an important liquidity-performance trade-off in the sample of UCITS hedge funds. Theresults also show that non-UCITS hedge funds generally have lower volatility and tail risk than UCITS hedge funds, which is consistent with hurdles to the transportation of risk management techniques.
• There are important domicile effects related to firm and fund performance. European-domiciled funds deliver lower risk-adjusted compared to funds domiciled in other regions. The risk-adjusted performance is highest for North American and Asia/Pacific-domiciled funds. There is similar performance between the main UCITS hedge fund domiciles. Ireland and Luxembourg-domiciled funds exhibit very similar performance measures.
James Skeggs, global co-head advisory group at Newedge, says: “Edhec-Risk Institute has a unique approach to academic research that is highly relevant to our industry and delivers added value for our clients. This is an exciting time for the asset management industry and we will watch the growing convergence of mainstream and alternative asset management with interest.”