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Managers risk shoehorning illiquid investment strategies into Ucits format, says COO
Feb 23, 2011 by Charles Gubert
Shoehorning illiquid investment strategies into Ucits wrappers could cause irreparable damage to the Ucits brand and hurt end investors in the event of liquidity drying up.
Magnus Spence (pictured), chief operating officer at the London-based alternative investment management firm Dalton Strategic Partnership (DSP), highlighted it was a great privilege to operate within the Ucits framework but warned the product was open to abuse. There are growing concerns that some managers believe the Ucits structure could be used as a safety net when adopting risky or illiquid strategies such as distressed debt, for example.
“There could be Ucits III-compliant hedge fund managers out there seeking to generate alpha in less liquid spaces such as small-cap stocks in Eastern Europe. I could envisage an event whereby liquidity dries up and investors attempt to exercise their right to get their money out but the manager prevents this from happening,” said Spence.
One of the preconditions for Ucits III is providing investors with weekly liquidity – compared to the quarterly liquidity offered by the majority of traditional offshore funds. If gates or lock-ins are imposed on investors in Ucits funds, the damage could be immense particularly given the reputational damage hedge funds suffered post-2008.
“Hedge funds did not cover themselves in glory in 2008. It was the one year where we, as an industry, had to demonstrate we could preserve capital and we failed. Many hedge funds didn’t preserve capital and prevented investors from redeeming their assets because of illiquid positions and side pockets,” rued Spence.
There has been a surge in investor interest in Ucits products recently. Capital allocations into Ucits-III compliant absolute return funds in 2011 could significantly outstrip the flows into Cayman funds, according to a Deutsche Bank survey of sophisticated investors. It was revealed these investors – who were overwhelmingly European- would allocate more than $185 billion into these funds over the next 12 months. In 2010, Cayman-domiciled funds experienced $55 billion of capital inflows.
“We have been given a phenomenal opportunity to ply the trade in a Ucits format, which is great for investors and it is a lifeline for our industry. Unfortunately, someone out there will take illiquid positions and abuse this. However, managers must not think that a Ucits-compliant strategy is copper-bottomed. Some investors at the end of the day may not get what they thought they were buying into,” he warned.
