Bringing you live news and features since 2006 

Stefan Keller, head of MAP research & external relations, Lyxor AM

Hedge fund firms bring incremental value in the Alternative UCITS space

RELATED TOPICS​

In spite of having registered significant investor appetite in recent years, empirical research on Alternative UCITS is a rare commodity. The major contribution of a new Lyxor research report is therefore to give investors a precise measure of the main characteristics of publicly regulated Alternative UCITS vehicles in comparison to traditional hedge funds, says Stefan Keller of Lyxor Asset Management…

For the first time, a comprehensive set of data has been analysed on a period from June 2004 to May 2011. The results shed light on what really matters for investors: regulation, manager skills and risk.

Regulation matters. The UCITS contribution to the hedge fund industry is to allow for a publicly regulated environment for hedge-fund like strategies. This framework has brought a new public offering by hedge fund managers to a new investor audience. However, the UCITS regulation is not well adapted to Hedge Fund strategies as a UCITS cannot easily use borrowings or directly short assets. As a result, the use of derivatives is an obligation for a large number of strategies, which can be costly. The findings of this study show that the regulatory constraints come indeed with a cost on performance. The average cost associated for accessing hedge-fund like strategies in the UCITS framework amounts to 432 bps on an annual basis. However, the performance impact of the regulation differs from one strategy to another. More specifically, highly concentrated (“conviction”) bets or those based on commodities cannot be expressed easily in the UCITS format, leading to significant underperformance in the CTA or Global Macro buckets.

Manager skills matter. The study finds that the performance of Alternative UCITS is affected not only by regulation but also by the skill set of the manager. In particular, hedge fund experience counts when choosing a manager for an Alternative UCITS product. Compared to managers with a “long only” background, hedge fund experienced managers bring incremental value in the Alternative UCITS context. On an annual basis, the average incremental value amounts to 100 bps, among all strategies. Interestingly, the outperformance of hedge fund experienced managers is highest among the CTA and Global Macro strategies, limiting somewhat the higher regulation costs discussed above.

Risk matters. Alternative UCITS present a more moderate risk profile than traditional hedge funds. For example, this study shows that the impact of the 2008 financial crisis on Alternative UCITS has been much smaller than on the hedge fund industry as a whole. While hedge funds analysed in this study present an annual volatility of 6.97%, Alternative UCITS show a volatility of 2.81%. Again, hedge fund experienced managers tend to outperform managers without hedge fund experience as volatility of Alternative UCITS with hedge fund skilled managers is further reduced and amounts for 2.52%.

To some extent, Alternative UCITS are a “deleveraged” version of hedge funds, with lower risks and lower performance. Overall, the risk/return profile of Alternative UCITS funds is appealing for a larger public as risk-adjusted returns are in line with those of hedge funds.

 

Latest News

Saving and investing app, Moneybox, has doubled the number of ETFs available on the platform, in the light of ‘growing..
Global X ETFs has announced the appointment of Ryan O'Connor as its Chief Executive Officer effective as of April 8, 2024. ..
Value-driven structured credit investing firm, Angel Oak Capital Advisors, LLC, has announced the completed conversions of two of its mutual..
Confidence in the continuing strength of bitcoin and Ethereum is driving wider interest in altcoins and other digital assets, according..

Related Articles

Sal Esposito, Zacks Investment Management
Zacks Investment Management started doing investment research in 1978 and in 1992 started its investment management arm, initially with SMAs...
Jeremy Senderowicz, Vedder Price
Jeremy Senderowicz, a member of the Investment Services Group at law firm Vedder Price, has witnessed a steady upswing in...
Graham MacKenzie, Toronto Stock Exchange
The evolution of ETFs has been a multi-decade experience for Toronto Stock Exchange says Graham MacKenzie, managing director, Exchange Traded...
Frank Koudelka, State Street Global Services
ETF data provider and ETF Express data partner, Trackinsight, has published its Global ETF Survey 2024 Report: ‘50+ Charts on...
Subscribe to the ETF Express newsletter

Subscribe for access to our weekly newsletter, newsletter archive, updates on the site and exclusive email content.

Marketing by