Ucits VI consultation premature, says ABN Amro Private Bank
The Ucits VI consultation is premature given that Ucits V and AIFMD are still in draft form while managers are only just beginning to acclimatise to Ucits IV, an institutional investor has warned.
Is the EU jumping the gun on Ucits VI?
The European Commission published its consultation on July 26, 2012 asking for industry comment on a variety of issues pertaining to Ucits. These include questions on which assets should be eligible for Ucits and whether rules on liquidity for eligible assets should be expanded.
“The European Commission is asking the right questions but debate over Ucits VI is seriously premature. Ucits V is still a work in progress while AIFMD has not been finalised. Only when these rules are finalised should we be properly discussing Ucits VI,” said Marc de Kloe, global head of funds and alternatives at ABN Amro Private Bank in Amsterdam.
“In terms of fund distribution throughout Europe, AIFMD has yet to resolve many issues. For example, if there is an AIFMD-compliant manager operating a Luxembourg SIF or Irish QIF, that manager is not guaranteed public distribution throughout the EU because some regimes are going to impose tough restrictions on distribution. There is also the issue of depositary liability which needs to be clarified. Only when issues such as these are resolved should we be discussing Ucits VI,” he added.
However, there is belief that the European Commission is going to grant Ucits eligibility to previously ineligible asset classes such as commodities. Investors can, for example, access commodities via Ucits through an index although there are question marks as to whether this costly route affords much investor protection. “Giving investors access to products such as commodities (through Ucits), which have only been available through indices is a welcome step forward,” commented de Kloe.
There are widespread concerns that some hedge fund managers are shoehorning excessively illiquid or overly complex strategies into Ucits. Some Ucits hedge funds have even complained certain managers are acting irresponsibly, adding their actions could irreparably damage the Ucits brand were one of their funds to blow up or suspend redemptions. European regulators have been aware of this problem for several years and have openly discussed the possibility of splitting Ucits into complex and non-complex to mitigate this risk.
De Kloe said the issue was less black and white than complex Vs non-complex Ucits, or liquid Vs less liquid Ucits. “It is possible to have a complex product in Ucits which is liquid, and simultaneously have an illiquid product that is very vanilla. It is not as simple as regulators make it out to be. For example, had some Ucits funds trading what they perceived to be liquid fixed income instruments been less judicious in their market risk analysis, we could have seen gates, side pockets and NAV suspensions when liquidity in that market dried up during the sovereign debt crisis,” he said.
Ucits hedge funds’ AuM currently stands at €129 billion, according to a report published by Alix Capital, a Geneva-based alternative investment specialist. The sector has grown by 18.3% over the last 12 months and there are now 776 single manager Ucits hedge funds. Funds of Ucits hedge funds have also grown annually by 64% on average since 2008 despite having an incredibly limited investable universe. Nevertheless, these companies remain small with 41% managing less than €20 million.