UCITS III funds have swelled in popularity with investors looking for more liquidity and less risk in turbulent times.
Dominique Lecocq (DL): UCITS Funds ease marketing and distribution efforts. The post-financial crisis has led investors to consider regulated collective investment schemes, rather than unregulated or less regulated investment vehicles. Some hedge fund managers have converted their investment strategies into Ucits-compliant strategies to benefit from this marketing trend. While Ucits funds are designed for conservative, diversified, liquid and less risky strategies, hedge fund strategies may be leveraged, volatile, aggressive and more concentrated. The Ucits Directive is clear on eligible investments and leveraging limits, and was not initially designed for hedge fund strategies. Many ‘Ucits hedge funds’ require the use of OTC swaps and/or total return swaps to implement their strategies with unacceptable Ucits underlyings.
However, this creates counter-party risk. The Total Expense Ratio (TER) may increase drastically compared to the TER of a hedge fund structured as a Professional Investors Fund (PIF), such as the Luxembourg Specialised Investment Fund, the Maltese Professional Investors Fund, or a Cayman Exempted Segregated Portfolio Company.