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Preqin Report the Future of Regulated Hedge Funds

Preqin Report the Future of Regulated Hedge Funds

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This report explains the future of hedge funds. Sign up at http://besthedgefund.blogspot.com for free hedge fund book and investment reports.
This report explains the future of hedge funds. Sign up at http://besthedgefund.blogspot.com for free hedge fund book and investment reports.

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Categories:Types, Research, Genealogy
Published by: http://besthedgefund.blogspot.com on Mar 13, 2010
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Preqin Research Report
UCITS - The Future ofRegulated Funds?
March 2010
Preqin Research Report:
UCITS - The Future ofRegulated Funds?
March 2010
One of the key topics in the hedge fund industry over the lastyear has been the growing presence of the highlyregulatedonshore versions of European hedge funds known as“Undertakings for Collective Investment in TransferableSecurities” or UCITS III. The rise in investor demand is evidentin the increasing numbers of managers offering UCITS productsand pursuing certain hedge fund strategies through UCITSvehicles. In order to better understand this shift, Preqin carriedout a survey of 50 institutional investors and 60 fund of fundsmanagers to discuss their investment preferences and viewson the future of the hedge fund industry in relation to regulatedhedge fund vehicles. Investor concerns about transparency,liquidity and risk management as well as future regulatoryoversight through the proposed Alternative Investment FundManager Directive (AIFMD) are among the contributing factorsfor a rise in demand and numbers of UCITS-compliant funds.
Investors’ Perspective on UCITS 
Preqin surveyed institutional investors from Europe and NorthAmerica, including public sector pension funds, private sectorpension funds, endowments, family of
ces, foundations,insurance companies, banks and asset managers. Both largeand small investors were surveyed with total assets undermanagement ranging between $40 million and $60 billion.8% of respondents currently invest in a UCITS vehicle (Fig. 1),and all of these are European based. One requirement of theUCITS structure is that a fund must be authorized by one of themember states of the EU, however, as most North Americaninvestors are less familiar with EU regulations, many do notspeci
cally target funds with this attribute, which is one reasonwhy UCITS funds are not as popular with US investors as withtheir European counterparts. The US investors surveyed wereless familiar with AIFMD, particularly as US investors mustcomply to a different set of rules enforced by the US Securitiesand Exchange Commission (SEC); for US investors, a UCITSfund must be pre-approved by the local regulatory authority.Despite this, over one-third of investors surveyed (35%) statedthat they are considering investing in such a vehicle in thenext 6-12 months, and this
gure included two US collegeendowments and a US-based charitable foundation. This showsthat interest in UCITS is not restricted to Europe. One Japan-based manager surveyed told Preqin that client demand forUCITS products is becoming stronger in Asia. Interest in UCITSwill likely expand in the future, not only in Europe, but in otherregions such as Asia, Latin America, the Middle East, and NorthAmerica, especially as the calls for increased regulation of theindustry continue.At the end of 2009, Preqin surveyed institutional investorsto ascertain their outlook on regulation of the hedge fundindustry. In total 83% of all investors felt that the industryneeded increased regulation. Enforced use of external auditorsand administrators, restrictions on leverage and enforcedregistration with
nancial authorities were commonly cited byinvestors as possible changes to the industry. UCITS funds are
Fig. 1:
Investor Attitudes Towards UCITS
Fig. 2:
Investors’ Main Reasons for Investing in UCITS
Preqin Research Report:
UCITS - The Future ofRegulated Funds?
March 2010
increasingly being viewed as the ultimate regulatory frameworkwithin the EU. The changes brought about by the introductionof UCITS III, and the proposals for the UCITS IV structure, areincreasing the number of hedge fund strategies that can beapplied to this framework and as a result more UCITS vehiclesare being launched. This in turn is attracting an increasingnumber of investors, many of which are looking for moreregulated funds to add to their hedge fund portfolios.In addition to increased regulation of the industry, over halfof institutional investors (53%) are seeking more liquidityand transparency in their hedge fund portfolios followingthe
nancial crisis. Furthermore, the Madoff affair and otherhigh-pro
le scandals have led to many hedge fund investorsbecoming more cautious and conservative in their approachto investing. 41% of the investors that are currently investingor considering investing in UCITS this year stated the mainreason was that UCITS provided greater transparency. 22%said the main reason was better liquidity terms, a further 22%gave regulatory oversight as the top reason, and 11% saidthe main factor was reducing their exposure to risk (Fig. 2).Recent market turbulence has led to some investors choosingto invest in a UCITS structure, as it serves to reduce the risk ofoperational losses.The UCITS structure is not appealing to all institutions, however.As shown in Fig. 3, 37% of the investors surveyed that did notinvest in UCITS reasoned that they were deterred from suchan investment because the UCITS structure is too limited. Dueto the limitations on the types of holdings UCITS managersare allowed to purchase and the amount of leverage that canbe employed, the UCITS structure cannot be applied to allhedge fund strategies, and as a result there are fewer fundstrategies available through UCITS-structured funds thanthrough traditional hedge funds. Having a limited number ofstrategies available has deterred many investors from makingtheir
rst investments in UCITS funds – particularly in the US,where hedge fund regulation is less prevalent. For example, aUS endowment with nearly $2 billion invested in hedge fundssaid UCITS funds have far too many investment and borrowinglimitations. Other reasons stated were that UCITS are notpart of their long-term investment plans (23%), they do nothave adequate resources to assess UCITS vehicles (17%),or investment in these funds is too costly (10%). UCITS IIIwill be replaced by UCITS IV in 2011 and should incorporatemodi
cations that bene
t many investors and managers, whichin turn should lead to an increased interest in UCITS funds.Despite becoming more mainstream, UCITS vehicles areunlikely to replace traditional hedge funds in the future.
Managers’ Perspective on the Growth in Demand for UCITSFunds
Preqin surveyed 60 fund of funds managers from across theglobe to report their views on UCITS funds. Managers from 13
Fig. 4:
51%11%0%10%20%30%40%50%60%EuropeAsia and Rest of World
Proportion of Managers Offering UCITS-Structured Funds by Region
Fig. 3:
13%10%17%23%37%0%10%20%30%40%50%OtherToo costlyNot enough resourcesNot part of strategic planToo limited
Investors’ Primary Reason for Not Investing in UCITS Funds
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