Last February, just before ESMA published its updated guidelines on ETFs and UCITS, Lyxor Asset Management made its first foray into the alternative UCITS space. Hand picked from its managed account platform, Lyxor launched the Lyxor/Tiedemann Arbitrage Strategy Fund, a merger arbitrage strategy run by TIG Advisors.
It was a wise decision. In a little over 12 months the strategy run on the Lyxor platform has grown to approximately USD650m with the majority of assets in the UCITS fund. Two other UCITS funds currently sit on the platform: a version of Winton Capital’s Diversified Program (above USD215m) and the Lyxor/Canyon Credit Strategy Fund (above USD190m), a credit long/short strategy.
Cyrus Amaria (pictured), deputy head of Alternative Investments at Lyxor says that there was a clear plan when launching these funds that they would comply with ESMA’s eligibility rules. “We excluded commodities from our managers’ strategies to stick fully to ESMA’s guidelines. Tiedemann has been the most rewarded fund in terms of asset growth. It’s one of the fastest growing hedge funds regardless of jurisdiction or structure.”
The growth that Lyxor is seeing in its alternative UCITS range is symptomatic of the wider market. Amaria sees no hold up in demand, even though AIFMD is now up and running and offers managers the option to launch regulated hedge funds.
“We think there’s a lack of supply of good quality fund managers in UCITS format. We now have three external hedge fund managers with UCITS funds on the platform and we believe that number can grow, especially as two of the three will likely face capacity constraints at some point,” says Amaria. “What’s interesting about the alternative UCITS market is that whilst AuM has grown from EUR100bn to EUR230bn over the last few years, the number of funds has actually fallen from around 800 to 700, which we attribute to the regulatory effect of ESMA changing its guidelines last year; there was a restriction placed on financial indexing exposure.
“That’s created a bit of a shakeup in the industry, especially among trend-following CTA managers.”
AIFMD-compliant funds will cater for a different market and there is no reason to suggest that UCITS and AIFs won’t be able to co-exist. Indeed, Lyxor has moved quickly to get its AIFM license approved in France to ensure that its managed accounts comply with AIFMD. It is currently in the process of transferring the MAP from Jersey to Luxembourg.
“We will concurrently run alternative UCITS and AIFs for our investors,” confirms Amaria. He summarises Lyxor’s approach to building out its alternative UCITS offering as follows:
• “As with our managed account platform, identify the highest quality hedge fund managers that can be converted into a UCITS fund
• Look at the UCITS effect on those managers: liquidity, removing non-eligible assets, capacity constraints. We want complete confidence that the strategy will work under the UCITS framework
• Ensure those selected managers can work in the Lyxor risk-controlled framework that has been tried and tested over several market crises
• Conduct a market analysis to gauge investor sentiment. Is the interest there for a particular strategy?
• Structure the fund accordingly by negotiating the best terms for investors for which fees and TER remain a key focus.”
With three funds having attracted almost USD1bn in assets, and with more launches in the pipeline, it seems to be a recipe for success.