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In prime position to support CTA UCITS funds

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Five years ago, UCITS funds weren't exactly a prominent blip on the radar screen at  Société Générale Prime Services, but over the last two years, excluding managed accounts, they have accounted for approximately 50 per cent of all new funds onboarded by the business in Europe. 

Andrew Dollery (pictured) is Director, Origination & Structuring at  Société Générale Prime Services. He looks after many of its UCITS fund clients and is also actively involved in the structuring and servicing of '40 Act funds, as well as hedge funds and managed accounts. 

"It is relatively easy to launch a UCITS fund. We even see start-up managers launching these funds as opposed to offshore funds. I would therefore argue that UCITS, broadly speaking, is an opportunity for everyone. That said, it is statistically true that the market is quite brand and cost sensitive, with a large percentage of inflows going to larger, well-established managers.

"Winton Capital is a perfect example. They have raised a lot of money in their UCITS products because people gravitate towards the brand as well as the long-term track record," says Dollery.

Dollery notes that US managers are keen to establish not only UCITS funds in Europe but are looking to have a '40 Act fund for the US domestic market as well. 

"We see US managers launching both types of funds. The rationale is that they have two products for US investors – a Delaware LLP feeder fund into a Cayman master fund for institutional investors and a '40 Act fund for more retail investors – whilst for the rest of the world they opt to launch a UCITS fund. It's a global distribution play," suggests Dollery.

 Société Générale Prime Services has a strong heritage in providing execution, clearing and financing to Hedge Funds & CTAs since it assumed full ownership of Newedge in May 2014. Indeed, with a 12 per cent market share it is the world's leading execution and clearing broker of listed derivatives. 

This makes the firm well suited to support CTAs who wish to introduce a UCITS product. One of the core principles of a UCITS fund is having a liquid portfolio that is able to meet the Dealing NAV restrictions, so in that sense trading futures contracts works well for CTA UCITS. However there are two main hurdles managers need to be aware of: 

"The first relates to commodities exposure, the second relates to bond concentration; because of the way these funds trade and model risk, they sometimes end up having high nominal exposure to bond contracts even if the portfolio risk is relatively low," explains Dollery, who continues:

"With respect to commodities, managers either strip them out altogether and trade the rest of the portfolio directly. Or, if they make up a material portion of the strategy, managers often use a certificate solution to gain access. This involves a bank, like  Société Générale, issuing a certificate to the fund which references an underlying managed account within which commodity futures are traded.

"That allows managers to indirectly trade commodity contracts and effectively transfer the exposure through to the UCITS."

As a prime services business, Dollery says that liquid alternatives are one of the key drivers of the bank's future growth: "Our clients are looking to launch these structures, or become a part of them, and it is becoming an increasing share of the business we do."

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