July 2011

Alternative Ucits 2011

Management talent Is Ucits the right Will QIFs and and distribution strategy for SIFs spoil the key to success managers? Ucits party? C o n t e n t s In this issue…

03 Management talent and distribution key to alternative Ucits success By James Williams

06 Are Ucits funds the right strategy? By Olivier Sciales and Rémi Chevalier, Chevalier & Sciales

11 Investor complacency creeping into Ucits Interview with Chris Hawkins, Gottex Fund Management

12 Alternative Ucits prosper but will QIFs and SIFs spoil the party? By James Williams

15 Distribution at the heart of MontLake Interview with Cyril Delamare, ML Capital

Publisher

Special Reports Editor: Simon Gray, [email protected] Asia Correspondent: James Williams, [email protected] Sales Managers: Simon Broch, [email protected]; Malcolm Dunn, [email protected] Publisher & Editorial Director: Sunil Gopalan, [email protected] Graphic Design: Siobhan Brownlow, [email protected] Photographs: © European Union Published by: GFM Limited, 1st Floor, Liberation Station, St Helier, Jersey JE2 3AS, Channel Islands Tel: +44 (0)1534 719780 Website: www.globalfundmedia.com

©Copyright 2011 GFM Limited. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 2 O v e r v i e w

Management talent and distribution key to alternative Ucits success By James Williams

The alternatives industry is today “The growth rate in alternative Ucits is experiencing a paradigm shift. Long the going to remain substantial for at least the preserve of ultra wealthy individuals and next two or three years. That for me is family offices, hedge funds are undergoing very clear,” says Eric Bertrand, Director of a cloning exercise, with managers offering Schroder GAIA, the firm’s Ucits platform. onshore vehicles to appeal to a wider Broadly speaking, most managers investor base. choosing to launch a Ucits do so either on There are now in excess of 400 alternative a banking platform or on an independent Ucits and the universe keeps on growing, platform such as GAIA. “The objective with recent surveys indicating that over of GAIA is not to be like an investment

100 hedge fund managers are considering Eric Bertrand, Director of banking platform,” adds Bertrand. “We want launching Ucits products. Schroder GAIA to offer a limited number of products that

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 3 O v e r v i e w are packaged and feel the same as any “To take alternative strategies other Schroders products and also avoid duplications of strategies.” and put them in a regulated BAML’s Ucits platform, MLIS (Merrill wrapper was an idea we felt Lynch Investment Solutions), is currently would really take off and it the industry leader, managing USD2.3bn in AUM. The firm saw alternative Ucits has. By the end of 2011 our developing as a trend three to four years target is to be approaching ago following the 2002 introduction of Ucits III. “To take alternative strategies and USD3-4bn in AUM.” put them in a regulated wrapper was an Miriam Muller, Head of MLIS idea we felt would really take off and it has. By the end of 2011 our target is to be approaching USD3-4bn in AUM,” explains Asset Management at Merchant Capital, Miriam Muller, Head of MLIS. which runs an independent platform, This is slightly less than the USD5bn that emphasises that they’re not trying to MLIS targeted at the start of 2011. Muller compete with the banks, just provide says the reason for this is that when new something different. “We offer an open- funds are launched, investors will wait to see architecture structure and aim to combine how it performs, adding that “in the early the independence sought after by the stages we find asset raising can be on the manager with quality infrastructure support slower side”. to allow scalability,” says Cadbury. The quality of fund managers joining Full service administrators like BNY platforms like MLIS illustrates the extent to Mellon are starting to profit as front to back which this asset class is maturing. Already office support for “newcits” accelerates. this year, Och-Ziff, AQR and Graham Capital “BNY Mellon generates a significant have joined MLIS, whilst Paulson & Co and revenue stream from these funds through Traxis Partners have joined Deutsche Bank’s our presence in the key Ucits domiciles of Platinum platform. Ireland and Luxembourg,” explains Mark Currently, 13 funds are available for Mannion, head of relationship management investment on MLIS. Muller confirms that EMEA, BNY Mellon Alternative Investment a further four managers are due to launch: Services. As well as offering a portfolio two sector funds (financial, sustainable management system which provides real- resources), a merger arbitrage fund and a time performance data to clients, Mannion US equity l/s fund. “In the pipeline we have says they also provide the options to five more managers at various stages of outsource mid-office functions “such as trade onboarding including: liquid emerging credit, matching and confirmation, settlement and liquid distressed debt, commodity equities collateral management”. and an FX fund,” explains Muller. “The sector will continue to evolve with Despite the size and scale of banking product innovation increasing the number platforms, George Cadbury, Director of of hedge fund strategies that can be accommodated within a Ucits structure,” “We offer an open- adds Mannion. Muller concurs, stating: “Certainly, we do, we always have and architecture structure we continue to see this as a sector with and aim to combine the a future.” Matrix Asset Management has been independence sought after running alternatives Ucits since August by the manager with quality last year when it rolled out the Matrix Asia infrastructure support to Ucits, managed by Rupert Foster. It now has three funds on its platform, having last allow scalability.” week launched the New Europe Ucits fund. George Cadbury, Director of Asset The other fund – Lazard Opportunities Fund Management at Merchant Capital – was launched last October. “We have a 8

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 4 


 








'$5 +($1

"( +$2
(2

#8- ,("
;1,
.%
'(&'+8
31 (-$#
+ 68$12
24//.13$#
!8
#,(-(231 3(5$
23 %%
-#
%."42$#
, (-+8
.-
-5$23,$-3
4-#2

-#
2
$"41(3(9 3(.-2
.1/.1 3$
 6
-#
1(5 3$
04(38
'$5 +($1

"( +$2
' 2
!$$-
".-2(23$-3+8
1$".,,$-#$#
!8
3'$
, ).1
+ 6
;1,
#(1$"3.1($2
24"'
2
$& +
$$*
1 "3(" +
 6
.,/ -8
3'$
.1+#:2
4(#$
3.
3'$
$ #(-&
-5$23,$-3
4-#2
 68$12
-#
3'$
$& +

%.1
-5$23,$-3
4-#2
.1/.1 3$
-#

-#
 -*(-&
-#
(- -"$


1.43$
#$
'(.-5(++$
 
47$,!.41& $+

 



 7

 



 666"2 5." 32+4

 


   


 

 C h e va l i e r & S c i a l e s Are Ucits funds the right strategy? By Olivier Sciales and Rémi Chevalier Continued uncertainty regarding the familiar expression among retail investors provisions of the European Union’s Alternative across broad swathes of South-East Asia. Investment Fund Managers Directive, despite The signature in 2008 of a Memorandum its formal finalisation on June 8, remains an of Understanding between regulators in China important growth driver for the growth of Ucits (CBRC) and Luxembourg (CSSF) offering funds offering alternative strategies. With the access to Chinese institutional investors to drafting of Level 2 measures to implement the invest in Luxembourg domiciled Ucits, as well directive in detail still months away at best, as the registration of Lux-domiciled Ucits in the lack of clarity is strengthening the appeal Latin American countries (ie. Chile, Columbia) of Ucits to institutions as regulated vehicles. underscores the way Ucits has grown into a An increasing number of alternative global brand, suggesting that over the coming managers are rolling out Ucits-compliant years non-European investment will continue funds to complement their offshore offerings. to increase as a share of aggregate assets They provide a clear, transparent way not under management. only to attract investors across Europe Alternative Ucits remain a relatively modest through the regime’s passporting feature, proportion of this huge global pool of assets – but thanks to their recognition among global some USD128bn as of the end of September regulators managers can capitalise on the 2010, according to one report (although popularity of Ucits in regions such as East other estimates range from USD100bn to Asia, Latin America and the Middle East. USD400bn). These figures suggest that at Luxembourg remains unquestionably the most Ucits account for 10 per cent of total Olivier Sciales and Rémi leading European centre for Ucits funds. Chevalier are founding hedge fund assets and probably rather less, Many of the biggest European and global partners of the Luxembourg and an even smaller proportion of the total fund groups have Luxembourg-domiciled law firm Chevalier & Sciales. USD5.8trn in Ucits assets under management. You may find more information Figures are understandably sketchy given management companies and well-established on www.cs-avocats.lu local fund services relationships, making the the difficulty in establishing a precise and grand duchy a logical domicile and service uncontroversial definition of alternative Ucits centre for alternative Ucits; anecdotal evidence – or ‘Newcits’ – a term much of the industry suggests that the jurisdiction is home to as hates but seems condemned to live with. much as 60 per cent of this market. Participants are also having to deal with The country’s muscle in the fund sector media comment about the development of is reinforced by a highly qualified and an alternative Ucits bubble, although the skilled workforce, famously international and steady rather than spectacular growth in multilingual, in all areas of fund services from assets gives this theory little support; so far custodians and administrators to auditors and at least. And while hedge fund managers lawyers. And the sector continues to grow, may look to replicate aggressive offshore with the trend toward new administrators investment strategies within these onshore setting up shop in Luxembourg continuing vehicles, the Ucits regulatory overlay is into 2011, while existing service provides are robust enough to provide broad protection adding to their staff. against catastrophic blow-ups. But a key opportunity for the grand duchy However, there is certainly a danger that lies in the increasingly international distribution retail investors may become confused about of Ucits, which has made the French term the risk-reward profiles of funds that use Sicav – open-ended investment company – a complex derivatives such as swaps to evade

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 6 C h e va l i e r & S c i a l e s

some of the investment restrictions inherent risk management procedures, some of them in the Ucits framework. The difficulty for retail might be better off establishing a Luxembourg investors in grasping all the implications Specialised Investment Fund (SIF) instead. of such structures – for instance, the Managers launching alternative Ucits with creditworthiness of swap counterparties – is the aim of targeting institutional investors if anything a greater concern than the actual should reflect on various questions before level of risk involved in these transactions. taking the plunge. First, a Ucits requires Improved communication can certainly at least twice-monthly liquidity, and hence help allay these fears, something that the redemptions; can the investment strategy latest revision of the regime, Ucits IV which accommodate this? Does the manager have came into effect on July 1, seeks to address the operational staff and infrastructure to with its replacement of the voluminous and handle Ucits-style transparency and reporting? inappropriately named ‘simplified’ prospectus And do they really need a European passport; with the stripped-down Key Investor what extra benefits will it bring? Information Document. The Ucits structure suits some strategies Inevitably national supervisors and the new better than others; equity long/short European Securities and Markets Authority strategies fit the investment constraints better (Esma) will continue to examine closely than most. There are certainly advantages in how managers are using Ucits funds as an onshore vehicle, but they’re not a catch- vehicles for alternative strategies. However, all solution for everyone. Managers need to the proposal by the French regulator, the assess all the factors carefully. Financial Markets Authority (AMF), to divide One positive point could be Ucits IV, the the category into complex and non-complex latest update of the directive, which came Ucits, as part of the second Markets in into effect across the EU at the beginning of Financial Instruments Directive (MiFID), could July. The most obvious improvement is that damage the brand, in particular by impeding streamlined procedures for authorisation of cross-border distribution in Asia. cross-border marketing offer fund managers The biggest risk facing alternative Ucits is quicker time to market. They may also benefit reputational rather than financial. With assets from efficiency measures such as the EU under management still modest and monthly passport allowing management companies inflows relatively small, the publicised risks to provide services to funds in other member of bubble developing seem exaggerated. To states and cross-border fund merger put matters in perspective, bubbles normally provisions, although time will tell how much. occur because of illiquidity and excessive Managers should also note a number of leverage, as with the 1990s’ dot com boom. other regulatory developments. According A more relevant criticism is the relatively to article 186 of Luxembourg’s legislation of weak performance of alternative Ucits in 2010 December 17, 2010, which transposed Ucits compared with offshore hedge funds. For IV into national law as well as introducing example, the Absolute Hedge Ucits Index other updates to the country’s fund regime, underperformed the Dow Jones Crédit Suisse Ucits established before the January 1, Hedge Fund Index by 6.84 percent in 2010. 2011 have until July 1, 2012 to replace their This could be influenced by start-up and simplified prospectuses with the Key Investor first-year operating costs, since much of the Information Document (KIID). sector is relatively new, but also by tracking During the next update of their fund errors relative to the managers’ comparable prospectuses, and at the latest by 31 offshore funds because of Ucits investment December this year, Ucits must also comply restrictions and liquidity requirements. with Esma’s guidelines on risk management. The obvious question is whether a hedge Finally, May 2010 guidelines from Esma’s fund manager running between USD15m and predecessor Cesr, the Committee of USD20m in an offshore fund really needs European Securities Regulators, make a an onshore vehicle too. Unquestionably, distinction between money market funds and managers for which the benefit is marginal short-term money market funds, which will are jumping on the Ucits bandwagon. Given require the updating of the prospectuses of the extra costs and the burden of retail-class Ucits funds falling into those categories. n

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 7 O v e r v i e w

4 simple strategy: where we see demand, and “The sector will continue where we have the in-house capability, we’ll produce products like the New Europe fund. to evolve with product For those clients looking for strategies, which innovation increasing the we don’t manufacture in-house, we look number of hedge fund to partner with other managers. We don’t manage convertible bonds in Matrix and are strategies that can be delighted to partner with Lazard,” explains accommodated within a the firm’s CEO of asset management, Angus Woolhouse. Ucits structure.” Matrix’s clients, says Woolhouse, have a Mark Mannion, head of relationship clear preference for absolute return funds management EMEA, BNY Mellon with a stable profile and a flexibility for a Alternative Investment Services manager to deliver returns whether the markets are going up or down. They listen to internally managed funds, perhaps one to what their clients want. three funds over the next 18 months. But In their recent Ucits barometer study, ML external managers will remain the driving Capital found that 49 per cent of investors force for some time.” surveyed wanted exposure to US equity With USD69.1bn in AUM, Man-GLG is the l/s managers. This is a clear trend and world’s largest hedge fund manager. The one that MLIS, as part of BAML, is able majority of its Ucits are long only, with 10 to act upon perhaps more effectively than alternative Ucits in the GLG range, and four others. “Certainly many of the managers or five in Man. Last month, the firm launched we’re working with are US-based. That its first joint alternative Ucits: Man-GLG Multi- continues to be the trend for us. Of those Strategy fund. “We’re positioning it as a best- in the pipeline, only one is not US-based,” of-breed product across the alternative Ucits says Muller. offering within Man-GLG, we think this is Schroders have a mix of internal and going to be a major initiative for us,” explains external funds on GAIA. Egerton Capital, Rhodri Mason, Head of Ucits Management, CQS and Sloane Robinson each have Ucits Man Group. “Not only can it allocate to our on the platform, whilst GAIA Opus Multi- existing funds but it has the flexibility to Strategy, a Ucits fund of hedge funds, is allocate to any future alternative Ucits we managed by Schroders New Finance. “We launch as well.” have another internal fund that’s still in the Branding is a key exercise for hedge fund seeding stage called QEP, a quant-managed managers looking to raise assets for these equity market neutral fund,” says Bertrand. funds. Competing with the likes of Schroders “Next year we have plans to roll out more and Man-GLG is no easy task. Schroders’ GAIA Egerton fund has already “We have a simple strategy: reached USD500m, whilst three of GLG’s funds are above USD500m. “These are Man where we see demand, AHL Trend, GLG Alpha Select Alternative and and where we have the GLG European Alpha Alternative, which has in-house capability, we’ll now passed the USD1bn mark. Several more have hit USD100m,” adds Mason. produce products like the Mason believes that to succeed in this New Europe fund. For those sector, you need to be able to do two things: firstly, you’ve got to have solid alternative clients looking for strategies, investment management capability. Secondly, which we don’t manufacture you need an industrial-strength operating in-house, we look to partner and distribution platform that can handle additional risk controls around Ucits and with other managers.” offer a brand that retail investors will Angus Woolhouse, CEO, recognise. “There aren’t many that can point Matrix Asset Management to doing both well and that’s why Man-

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 8 O v e r v i e w

GLG is so well positioned. That’s the key to “We’re positioning the new unlocking success in the alternative Ucits space,” notes Mason. Man-GLG Multi-Strategy fund Skyline Capital Management, established as a best-of-breed product by Geoff Bamber and Vernon West last across the alternative Ucits year, recently launched a global emerging market l/s Ucits on ML Capital’s MontLake offering within Man-GLG, we platform. On branding, Skyline CEO Vernon think this is going to be a West comments: “It gets you noticed: for an early stage manager it’s necessary but major initiative for us.” not sufficient to secure inflows. Once you’re Rhodri Mason, Head of Ucits on the radar it’s all about performance. Management, Man Group As a hungry, focused emerging manager, Skyline expects to outperform its peer group over time.” of our investors and we’re a little off that On asset raising, Matrix AM’s Woolhouse so far this year. China has been sold off says: “It has been difficult for everyone, aggressively by the marketplace and it was but we’ve raised assets ahead of our our largest single country exposure so we expectations and we are hopeful of doubling were disproportionately affected by that sell- assets by the end of this year.” off,” adds Woolhouse. Issues remain over the performance of Tracking errors are inevitable with Ucits these “Newcits”. “The market environment and certainly impact on performance, to is difficult. I’m surprised about macro (-0.31 some extent. “There’s no issue having per cent) and CTA as well (-1.51 per cent), differences between portfolios of a flagship although fixed income funds are holding and Ucits provided those differences are their ground (+1.32 per cent). Most of the clearly articulated,” comments Bertrand. commodity funds with a directional bias He confirms that the performance are suffering although they had a good between the Egerton Ucits and its offshore run at the start of 2011,” comments Louis flagship is very satisfactory and expects Zanolin, whose firm Alix Capital generates the same for the CQS fund over time. “For the Ucits Alternative Index. “I’m surprised at Sloane Robinson we expect the tracking the dispersion of returns. Some are doing error to be slightly wider than for Egerton. okay but the majority are quite weak. It’s a A small part of its flagship portfolio in strange environment.” emerging markets is invested in smaller, less “With respect to the Asia Ucits, May was liquid stocks.” difficult for us and the whole industry. We With everyone waiting for a blow- target 10 to 12 per cent net return on behalf up, platforms like Merchant are taking significant steps to ensure they remain “one “It gets you noticed: for an of the most technologically advanced and controlled” according to Cadbury. One such early stage manager it’s development is the employment of a pre- necessary but not sufficient trade compliance system, an automated to secure inflows. Once traffic light system informing managers whether impending trades are Ucits you’re on the radar it’s all compliant or not. “Pre-trade compliance will about performance. As a soon become an integral part of the industry in reducing susceptibility to a blow-up,” hungry, focused emerging says Cadbury. manager, Skyline expects to “There’s a place in investors’ portfolios outperform its peer group for the full range of products,” concludes Muller. “I think there’s a confluence of long- over time.” only funds versus alternative investments Vernon West, founder of Skyline and with our alternative Ucits products we’re Capital Management seeking to fill this niche.” n

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 9 GOTTEX FUND MANAGEMENT

Gottex Fund Management:  has provided fund investment advice since 1992,  is fully accustomed to transparency and providing comprehensive information as a company listed on the Swiss exchange and registered with SEC and FSA,  is one of the largest non-US based FOHF in terms of pension fund assets globally1; and  provides customised solutions and services through its subsidiary Gottex Solutions Services.

Source: Towers Watson Top 50 FoFs 2010 www.gottexfunds.com For more information contact: Andrew Crawford, Investor Relations Tel: +41 21 612 00 26 Email: [email protected] Gottex Fund Mana g e m e n t Investor complacency creeping into Ucits Interview with Chris Hawkins

Funds of Ucits hedge funds are a recent manage and understand risk and undertake product development: the Gottex Absolute in-depth due diligence on underlying Return Fund, a multi-strategy product, managers. Hawkins says that when potential launched 7th July 2010. As such, few have new clients are told that the difference in had the chance to produce eye-popping their due diligence of Ucits hedge funds returns because in the time they’ve existed, versus offshore hedge funds centres on the markets have been sluggish. “I think liquidity issues, eyebrows are often raised. when equity markets improve you’ll find “Understanding liquidity profiles and what returns starting to pick up and investor the impacts would be in anything other than interest will grow,” says Chris Hawkins, benign markets takes some skill, particularly Managing Director and Portfolio Manager of Chris Hawkins, Managing in more exotic strategies like credit and Director and Portfolio Gottex Absolute Return (Ucits) Funds. Manager of Gottex Absolute arbitrage strategies. We devote a lot of time Alternative Ucits funds are easily Return (Ucits) Funds to this,” confirms Hawkins. understood, regulated, and transparent. The ability to actively allocate across Consequently, some investors are allocating managers is important. “We’re at the point directly to managers rather than paying a now where the market is getting saturated FoFs adviser to construct portfolios. Such and investors are getting confused. The investor complacency creeping into the process of being able to research enough market is due, in part, to the lure of regular funds will become valuable,” notes Hawkins. liquidity and the imprimatur that comes with Gottex’s own FoUHFs uses a multi- what is viewed by some as a government- strategy approach, which, in Hawkins’ words, approved product. is in keeping with the firm’s culture and But as Hawkins points out: “People think philosophy. Since inception it has grown of Ucits III as highly liquid funds, but they’re from 10 to 20 underlying managers and only as liquid as the portfolio of assets they currently manages EUR14m in AUM. represent. It’s easy to stick a weekly liquidity The alternative Ucits industry, says tag on a fund in benign markets, but we’ve Hawkins, has a lot of equity beta. Given yet to see these portfolios get tested in a that investors who choose to pick funds situation like ’08 where the ability to liquidate tend to stick with what they know, it’s efficiently becomes challenged.” understandable why diversification through As the alternative Ucits asset class has FoFs can be useful. grown it has created unwanted elements “If you own a cross section of the Ucits of risk, principally surrounding liquidity, that universe you end up with poor performance. retail investors may not understand.“The law As we’ve seen in May and June, equity of unintended consequences is very powerful beta can hurt you. But if you have exposure in a product like this,” explains Hawkins. “We to strategies that investors typically don’t suspect there’s a lack of recognition of true tend to be comfortable with, like our multi- risk and over-reliance on the stated liquidity strategy fund, you get real benefits of terms. We have some concerns that there diversification.” are funds where the potential of a liquidity Hawkins confirms that the best performing mismatch to occur is under-estimated by a strategy in the fund’s portfolio, to date, has proportion of their investor base.” been credit, providing what he calls a good What FoF providers offer is the ability to “volatility dampener”. n

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 11 u C i t s t R e n d s

Alternative Ucits prosper but will QIFs and SIFs spoil the party? By James Williams

The last twelve months have done a lot to There are roughly 400 funds, growing consolidate peoples’ views of alternative in response to institutional demand for Ucits. Fund managers have started to wake regulated hedge fund-lite products. “In the up to the obvious benefits of having an last two quarters 50 per cent of net inflows onshore vehicle and the value that the Ucits into hedge funds came from institutional structure can bring. investors and this trend is growing. They Every month new funds are being have a preference for regulated structures,” launched, transforming a sector that was comments Olivier Laurent, Head of Hedge & once the preserve of equity l/s strategies Structured Fund Group, RBC Dexia. into one populated by more diverse, complex One of the catalysts behind this growth strategies including event-driven, global is a desire for managers to circumvent the macro, credit and CTAs. The emergence of AIFMD which, in 2018, will make it difficult to John Paulson, Barton Biggs of Traxis Partners market offshore funds as private placement and York Capital illustrates the depth of regimes. “It’s difficult to imagine European hedge fund talent embracing Ucits. institutions going for Cayman funds because Net inflows into Ucits, YTD, are EUR51bn. it won’t be possible to do active marketing. Total industry AUM is EUR5.88trn, but “Other Over time, regulation will be a key driver Ucits”, including alternatives, still represent for the growth of regulated structures,” a tiny portion of the market: 6 per cent, adds Laurent. equivalent to somewhere between USD300bn Peter de Proft, Director General of EFAMA, and USD400bn. thinks the hype surrounding alternative Ucits

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 12 u C i t s t r e n d s

is cooling down: “There’s a much bigger ESMA is currently looking into the issue, rise in ETFs so things need to be kept in something EFAMA welcomes. “We have perspective. The growth of ETFs is much excellent relations with ESMA,” adds de more important than alternative or AR Ucits, Proft. “We have confidence they and national call them what you will.” regulators will continue to enforce Ucits “Absolute return funds use derivatives requirements for all Ucits managers in an and are certainly not a new product adequate manner and maintain a level consideration. They’ve been around playing field.” for a long time,” adds Gary Palmer, Fund centres like Ireland and Luxembourg Chief Executive, Irish Funds Industry are benefiting from the way the industry is Association (IFIA). evolving, and will continue to so under the Olivier Laurent, Head of Hedge The size of alternative Ucits, relative to & Structured Fund Group, RBC Ucits IV directive, which will encourage even the offshore funds they seek to replicate, Dexia more efficiency and transparency. remains surprisingly small. Paulson & Co, a The evolution of the Ucits framework multi-billion dollar fund manager, launched has allowed Ireland to develop into a well- its DB Platinum IV Paulson Global Fund with established domicile for internationally around USD100m: tiny in comparison to the distributed investment funds, both in the Paulson Advantage fund. Ucits and more flexible QIF structure. Assets remain modest for two reasons: According to Palmer, unrivalled depth and firstly, overall performance is flat. The breadth of expertise and experience are Alternative Ucits Global Index has returned the hallmark of its industry, not to mention 0.17 per cent this year, while hedge funds innovation: it was the first jurisdiction are up 1.96 per cent: a significant 10-fold to introduce regulation for alternative performance swing. The same was true investment (QIFs). last year. Secondly, although “Newcits” are “We’re always looking to anticipate the being snapped up by retail investors, big next wave of industry requirements, whether institutions and their chequebooks remain that be thought leadership in the servicing largely in the shadows. of funds, or in the legal, regulatory and “It’s reassuring to have the protection of tax frameworks for product development,” Ucits but they didn’t go for it before because explains Palmer, citing the development of its it’s not what they needed. Some say that legal framework to provide tax certainty for ideally they wouldn’t invest in Ucits but they Ucits funds as a recent example. have constraints that push them to do so,” The Association of the Luxembourg comments Samuel Sender, Applied Research Fund Industry (ALFI) is pleased with the Manager at EDHEC-RISK Institute, whose growth of Ucits funds according to Deputy research is sponsored by CACEIS as part of Director General, Charles Muller, although the research chair “Risk and Regulation in he admits some are more risky and less the European Fund Management Industry”. adapted to the needs of retail investors. “We Some worry that strategies are getting believe that if these funds use the “Ucits too complex. De Proft confirms that a recent brand”, it’s because there’s currently no meeting of the European fund classification alternative providing a European passport,” working group was held at EFAMA to assess explains Muller. the different types of funds within the Ucits Peter de Proft, Director Luxembourg is the leading centre for cross- General of EFAMA framework. The French regulator AMF border fund distribution. According to Lipper- proposes to classify them into complex and PwC figures, it’s home to over 75 per cent non-complex Ucits. of “true” cross-border funds. “Luxembourg “The important phenomenon right now is truly international both in terms of asset is that regulators are paying attention management companies and workforce; half to investor protection, particularly retail are foreigners. A quick implementation of investors. They’re assessing what type Ucits IV last December demonstrated our of funds are being sold to them, that the leadership role,” adds Muller. strategies are not too complicated to With 80% of Ireland-domiciled funds understand, and I think that’s very important,” being Ucits, Palmer expects the increased says de Proft. attractiveness of Ucits IV to provide a 16

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 13 For more information visit www.montlakeucits.com

A leading UCITS platform with active distribution

MontLake delivers the optimal solution for hedge fund managers looking to launch their own UCITS fund. Coupled with the highest standards of corporate governance, operational excellence and superior client service, MontLake provides managers a fast and cost efficient route to market. MontLake’s key differentiator is its distribution strength, offering the largest independent sales network in the industry - setting the benchmark for alternative UCITS funds.

Contact us on A product from +41 22 318 5670 [email protected]

MontlakePressAd_Chosen - v2.indd 1 13/10/2010 17:33 M L C a p i ta l Distribution at the heart of MontLake Interview with Cyril Delamare

Come September, ML Capital’s dedicated that Ucits has been around a long time, Ucits platform, MontLake, is on target to distribution channels are well established. have four funds operating on it, in what is Delamare’s sales team in the UK, for so far turning out to be a good year for the example, targets IFAs, fund platforms and Malta-headquartered firm. It was announced Ucits FoFs where retail investors dominate this month that Skyline Capital Management alternative Ucits. will launch a global l/s emerging market By comparison, France has few IFAs. Ucits and follows the earlier announcements Much of the business is done with of DUNN Capital Management and New York institutional investors such as pension funds. event-driven manager, Para Advisors. “It’s a completely different demographic

MontLake was launched in Q4 last year Cyril Delamare, ML Capital’s and approach to selling products,” says specifically to attract hedge fund managers CEO and Head of Global Delamare. A fund manager that chooses like those listed above. “One of the key Distribution MontLake knows that both sides of the drivers of managers coming to us is they investment market are therefore covered. can see we have an in-house sales force The real opportunity and challenge for working exclusively on MontLake. Few alternative Ucits funds is to take market independent platforms, if any, can boast share from the well-established and marketed of having a dedicated 10-strong sales traditional fund houses. Delamare makes team. This is one of the platform’s key the point that the biggest alternative Ucits differentiating factors,” says ML Capital’s fund raisings last year were achieved by the CEO and Head of Global Distribution, Cyril behemoth mutual fund groups and not hedge Delamare. As well as managing MontLake, fund groups. Branding is key to this. the licenses, and handling compliance and Understanding exactly what strategies risk management, ML Capital also acts as a investors want saw the firm produce a fund manager’s distribution arm in Europe. Ucits funds barometer – a quarterly survey Delamare is quick to point out the value – earlier this year. “On the one hand it’s a of this proposition. Notwithstanding the need tool that allows us to keep in contact with for state-of-the-art technology and quality investors and on the other hand it’s market staff, just being a platform provider means intelligence,” explains Delamare. you quickly become a commodity. “If you The same 50 investors representing want to open up your business, distribution different demographics investor types is where you bring in significant revenues and countries take part in the survey. and differentiate yourself with unique access The last survey found that 49 per cent of to certain clients and demographics,” investors wanted to allocate to US equity l/s explains Delamare, who adds: “Distribution managers. This market intelligence is helping is at the heart of launching Ucits funds on ML Capital choose its next wave of fund MontLake. We’re not looking to be a hotel launches, although Delamare admits that but a boutique that launches Ucits funds in they’ve yet to find the right candidate in the response to investor demand.” US equity l/s space. ML Capital has distribution offices in “Ucits now is a structure you need to London and Geneva and operates in a have if you want to raise assets in certain number of core countries including: the UK, demographics,” concludes Delamare. n Ireland, France, Switzerland and Italy. Given

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 15 u C i t s t r e n d s

13 “significant opportunity”: “We’ve been ideal for investors as it impacts on fund working with our Central Bank colleagues to performance. ensure the requirements under Ucits IV are With the AIFM Directive looming large, well understood. The industry over the last another interesting trend is emerging: QIFs two years has been working towards that.” and SIFs being preferred to Ucits. RBC Dexia, De Proft thinks the KIID document is in their last report, found that 77 per cent of the key provision in Ucits IV: “It’s a clear fund managers who don’t yet have a Ucits document that will hopefully be the standard would consider these alternative structures. for all retail products.” He admits that it is too Laurent says he was a little surprised by the soon to decide how well the master/feeder percentage, but it could be that managers provision will work, stating: “Co-operation want to perfectly replicate their offshore Gary Palmer, Chief Executive, between regulators is key and is already Irish Funds Industry strategies, which is possible with a QIF. well established.” Association (IFIA) Tracking errors under Ucits are The danger with alternative Ucits is that unavoidable given its limitations, but fund managers may be jumping on the Laurent believes that one of the key bandwagon. The risk, moving forward, is advantages “Newcits” has over QIFs and that low quality managers will sell Ucits SIFs is the ability to sell to retail investors. products with a high hedge fund fee structure. In jurisdictions like France, pension funds Although robust enough to protect against are restricted from investing in these non- blow-ups, the possibility remains that the Ucits structures. “For hedge fund managers global recognition Ucits enjoys could become it might make more sense to have a QIF, but compromised. “The risk is that good quality the distributor may try to convince him to go guys remain unregulated hedge funds for a Ucits structure instead,” says Laurent. while those not able to survive could go for “In 2010 there was a 33% increase in the something that is easy to sell,” opines Sender. value of assets in Irish QIFs. If one looks De Proft is unconcerned about a blow- forward and with the anticipation of AIFMD, up because as gatekeepers of the Ucits it’ll provide a passportable non-Ucits product. brand “we’re looking at what’s going on in Maybe in a number of years’ time we’ll be the market on a daily basis with ESMA and talking about an AIFMD non-Ucits product the regulators. We want to avoid possible framework in the same way and with the accidents, that’s why all these exercises are same success as Ucits,” says Palmer. being done.” The industry will likely see managers One emerging trend is fund managers choosing co-domiciliation as the regulatory using total return swaps (TRS) to replicate environment evolves, maintaining their offshore strategies, rather than investing offshore Cayman vehicles whilst at the same directly in the underlying securities. A recent time running an onshore Ucits or QIF. report by Alix Capital found that 63 per cent “Where I’m a little worried regarding of investors had reservations. A TRS is sustainability of the Caymans model is for one of the methods of getting around Ucits mid-sized hedge fund managers as they try limitations, given that managers are restricted to grow their onshore and offshore funds,”

by the assets they are allowed to invest in. Charles Muller, Deputy says Laurent. He concedes that some of Unlike the flexibility of hedge funds, Director General, The these managers might move completely Ucits present two sorts of limitations: Association of the Luxembourg onshore to control costs. Alternative Ucits Fund Industry (ALFI) firstly, not all strategies (eg. distressed are set to dominate the industry as a debt) can be packaged in Ucits; secondly, portfolio diversifier, but they won’t eclipse the managers cannot directly access assets like offshore market. commodities, nor can they directly short sell. “In 2010 there was a 33 per cent increase in They therefore rely on derivatives, which the value of assets in Irish QIFs. If one looks creates an added layer of costs. forward and with the anticipation of AIFMD, it “Some Ucits restrictions such as short- will provide a passportable non-Ucits product. selling can be avoided with the use of Maybe in a number of years’ time we’ll be derivatives. You can package a lot of things talking about an AIFMD non-Ucits product that way, but it comes with additional framework in the same way and with the fees,” explains Sender. This isn’t altogether same success as Ucits,” says Palmer. n

Alternative Ucits Hedgeweek Special Report Jul 2011 www.hedgeweek.com | 16