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Ucits structure could distort hedge fund strategies

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Structuring hedge fund strategies as Ucits will distort strategies and diminish returns, according to a survey by Edhec-Risk Institute.

Many strategies would need to be altered to earn the Ucits label, and liquidity requirements would put the liquidity risk premium out of reach, the survey found.

Sixty nine per cent of participants think that the “liquidity premium of hedge fund strategies will disappear and that performance will fall” when hedge fund strategies are structured as Ucits.

The survey suggests that institutional investors bound by quantitative restrictions will ask fund managers and distributors to repackage hedge fund strategies as Ucits. For instance, 62.5 per cent of insurance companies envisage asking promoters/managers to restructure hedge fund strategies as Ucits.

For their part, managers of alternative funds are concerned by the uncertainties surrounding the directive on alternative investment fund managers and may consider packaging their strategies as Ucits. Sixty per cent of alternative investment funds very much agree that the directive leads to uncertainty about the distribution of funds; 65 per cent of alternative investment funds plan to restructure their funds as Ucits, whereas 25 per cent do not.

Edhec-Risk suggests improved regulation of investment funds and properly designed incentives: incentives to invest in illiquid assets could be designed in regulated closed funds with a fixed horizon; incentives to adopt the AIFM directive must be given by modifying the prudential regulation of European institutional investors, notably insurers, and authorising them to invest directly in funds that comply with the AIFM directive; incentives to manage rather than to insure non-financial risks must be given by defining more clearly the responsibilities of distributors, asset managers, depositaries, and valuators.

The survey of Ucits and alternative asset managers, their service providers, external observers, and investors was part of the Caceis research chair on non-financial risks in investment funds.

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