The paper provides an academic analysis of the main techniques that are currently used by hedge fund managers and that could be transported to the mutual fund and alternative UCITS space. Techniques are categorised into three groups: (i) risk management, (ii) alpha generation and (iii) leverage. UCITS regulations impose several investment restrictions: it was therefore discussed whether techniques employed by hedge funds can be transported to the UCITS and mutual fund space.
It also provides an empirical comparison of the performance of UCITS and non-UCITS hedge funds. Based on regulatory constraints, which differ by country, EDHEC economically motivates a range of hypotheses regarding differences in performance and risk between UHFs and HFs. They are empirically tested using one of the most comprehensive hedge fund databases constructed to date. EDHEC finds that UHFs underperform HFs on a total and risk-adjusted basis. However, UHFs have more favourable liquidity terms and when liquidity matched groups of UHFs and HFs were compared, it was found that their performance seems to converge. An important liquidity-performance trade-off is uncovered in the sample of UHFs. The results also show that HFs generally have lower volatility and tail risk than UHFs which is consistent with hurdles to the transportation of the risk management techniques discussed. Finally, EDHEC found important domicile effects related to firm and fund performance.
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