Fred Sage, managing partner of Decision Analytics Advisory Partners, says the Next Generation Absolute Return Ucits Sicav and Ucits Fund of Funds will offer investors a unique selection of hedge fund strategies with all the protection offered by a Ucits umbrella fund structure, backed up by a broad range of internal and third-party sophisticated Ucits funds expertise.
GFM: What are the Next Generation Absolute Return Ucits Sicav and Ucits Fund of Funds?
FS: In collaboration with a number of entrepreneurial firms and individuals, Swiss-based advisory firm Decision Analytics Advisory Partners has established the Next Generation Absolute Return Ucits venture to tap into the demand for more liquid, tighter-regulated hedge funds.
The venture offers investors access to a funds family product range comprising sophisticated Ucits funds managed by carefully selected specialist/boutique investment management firms. The structure consists of a Ucits III Sicav umbrella fund with a number of sub-fund compartments. The Next Generation Absolute Return Ucits Fund of Funds will occupy one of these sub-fund compartments as well as individual absolute return strategies run by third-party managers in which the fund of funds invests. Investors can access a sub-fund directly or via the fund of funds.
The operating framework includes risk management, compliance and the capability to act in an investment management capacity if necessary. The Next Generation Absolute Return Ucits Fund of Funds could provide part of the sub-fund seed capital along with third-party early-stage investors if required.
Banque Privée Edmond de Rothschild Europe, the Luxembourg-based subsidiary of the Geneva-based LCF Rothschild Group, has been appointed custodian and administrator for the Next Generation Absolute Return Ucits Sicav.
The first quarter of this year will see the launch of a number of sub-funds advised by US-based managers whose strategies include global macro, emerging markets and managed futures, as well as the Next Generation fund of funds sub-advised by Germany’s Acatis Investment and an insurance-linked securities fund sub-advised by Swiss-based Secquaero Advisors.
During the course of this year, Decision Analytics will continue to conduct due diligence and select new funds and their managers for the Next Generation Sicav, with the aim of reaching a minimum of 12 sub-funds by the end of 2010.
GFM: What is the philosophy behind the launch of the Next Generation Absolute Return Sicav?
FS: We are building a funds family similar to what American Express Bank achieved with its World Express Funds Sicav business. Bob Friedman, the former head of the American Express Sicav business, is working with us to execute our plans. They used third-party specialist managers in order to offer a high-quality range of Ucits funds involving long-only and hedge fund-like strategies. Using specialist external managers is consistent with our open architecture approach, which allows us to benefit from third-party skills and expertise across all disciplines.
GFM: What is the difference between the Next Generation Sicav and a Ucits platform?
FS: We consider ourselves to be a regulated investment management business that offers a unique range of sophisticated Ucits funds, as opposed to a platform that offers services to asset managers enabling them to launch a Ucits fund.
No matter how the manager is sourced, whether they approach us or we approach them, we are obligated to all parties including investors, other sub-fund managers, the service providers and ourselves to conduct extensive due diligence. Even though the sub-funds are ringed-fenced in terms of assets and liabilities, all sub-funds carry the Next Generation name in addition to the manager’s name, and therefore our selective approach seeks to mitigate the possibility of something going wrong.
In addition, the funds family concept offers diversification in terms of investment strategy, sector and geographical focus, and we seek to avoid any conflicts among the sub-funds. Also, we consider the managers to be our partners, and based upon market and investor demand, we plan to launch additional funds with these managers, leveraging their existing investment skills and resources.
GFM: What is the role of the fund of funds?
FS: The fund of funds will be another fund within the family, and will invest only in sophisticated single-managers Ucits funds. Its investment policy and objectives is to provide part of the seed capital for the Next Generation single-manager strategies, but it will also invest in other existing Ucits funds outside the Sicav.
At some point the portfolio will comprise half our own and half external funds, all of them sophisticated Ucits funds. Therefore our portfolio will not be constrained by the limited supply of Ucits funds that employ hedge fund-like strategies.
Investors will have a choice between investing in one or more individual sub-funds or via our fund of funds. We can also create customised portfolios, and they can also create white-label products.
GFM: What are the constraints of working within the Ucits structure?
FS: There are restrictions in terms of the eligibility of the investments that can be included in a portfolio and in general the investments, whether equities or bonds, as a rule should be listed on a recognised exchange, though they don’t have to be exchange-traded.
The funds must meet liquidity requirements with redemptions bi-monthly at a minimum, and on a global exposure basis the maximum leverage they can use is equivalent to 200 per cent of assets under management. A portfolio concentration constraint limits a single investment to 10 per cent of assets under management, and there are also counterparty limits.
GFM: Why are investors attracted to hedge fund strategies offered through Ucits structures?
FS: Investors can invest in hedge funds with the confidence that there is safekeeping of assets, that they will get their money back when they want it, that rigorous risk management controls are in place, and there is a robust operating framework including compliance on every trade. Ucits funds are highly regulated, and all the players involved take their responsibilities very seriously.
GFM: What approach have you used in terms of the skills and resources you need for the venture?
FS: The whole field of repackaging non-Ucits hedge funds as Ucits-compliant funds is new territory for the investment management industry, and I wanted to make sure we could offer the necessary skills and experience. Our open-architecture approach means we are not constrained by our internal experience and enables us to work with best in class service providers, investment managers and third-party distributors if necessary.
Since it’s a new area, there aren’t a lot of people with experience in launching and operating sophisticated Ucits funds. This is one reason we recruited Bob Friedman to the Decision Analytics board of advisors and to the Next Generation Sicav board of directors, because he effectively was one of the pioneers in this field as the former head of American Express Bank’s World Express Funds Sicav business.
Bob brings us a tremendous amount of experience about what works and what doesn’t, which we will benefit from, gives us a great deal of comfort and credibility. Meanwhile Banque Privée Edmond de Rothschild Europe brings significant experience as an administrator and custodian of sophisticated Ucits funds. Overall our collective skills and experience is a brilliant risk tool that mitigates the risk of something going wrong.