More managers entering Ucits despite regulatory uncertainties
More hedge funds are moving onshore in light of European Union (EU) regulation and investor demands despite soundings from the European Securities and Markets Authority (ESMA) about tighter scrutiny of Ucits vehicles.
“I anticipate more hedge funds adopting a Ucits structures in light of the Alternative Investment Fund Managers Directive (AIFMD) and the increasing number of pension funds allocating into alternatives,” said one industry expert speaking under Chatham House Rules at Bloomberg’s Start up Hedge Fund Summit in London last week.
“Onshore funds are becoming more popular,” he added. There was a surge in Ucits when AIFMD was first proposed while a 2011 Deutsche Bank report revealed that inflows into Ucits funds looked likely to outstrip those of Cayman-domiciled funds.
However, there are concerns that some managers are putting increasingly illiquid, highly leveraged esoteric products into Ucits vehicles. ESMA has repeatedly expressed concerns that some absolute return Ucits vehicles pose a threat to the Ucits brand.
Some have warned that esoteric Ucits products could lead to a Ucits blow-up not too dissimilar to the Lehman mini-bond scandal in Hong Kong during 2008. ESMA is currently holding a consultation on both Ucits funds and exchange traded funds (ETFs), the findings of which will be due out later in 2012.
There are concerns that ESMA has not properly defined leverage limits on Ucits products which is raising consternation among some managers.
“Regulators may impose from five times leverage onwards a minimum subscription level of $100,000 or more depending on the situation. Frequently managers do not know the exact amount of leverage they can use until they register with regulators. Managers should employ expert advice if they want to ensure they meet regulators’ criterion for Ucits leverage limits as it is not a fixed limit,” said Aymeric Lechartier, managing director at Carne Group.
ESMA is also putting particular focus on index linked Ucits funds. “Many managers use Ucits rules surrounding indices to create Ucits compliant systematic or commodity trading advisor (CTA) funds. This is something regulators are scrutinising and it will be interesting to see their conclusions and proposals,” added Lechartier.