FN: Will UCITS consign offshore hedge funds to history?

28 June 2011

David Miller from Cheviot Asset Management argues that risk control and regulation alone do not add value without the ambition to seek out return. The challenge for hedge funds choosing the UCITS route is that ticking boxes to satisfy the regulator is not enough.

There is no doubt that the UCITS structure when compared to offshore funds has many advantages for UK investors, including more favourable tax treatment, better regulatory oversight and the promise of liquidity. This is a practical solution for most UK investors wishing to invest in hedge funds, and increasingly is available even to those with modest means. However, just because UCITS funds are regulated, it does not follow that this is the same as an EU performance kitemark. There is no connection between regulation and good performance. Investors still need to understand what they are investing in so that they are aware not only about the potential return, but also the risks involved.

Most private investors have the ‘modest’ ambition of preserving the value of their savings without taking major risks. Where there is confusion is that the UCITS/hedge fund industry and also the regulators have assumed that this ambition refers to nominal wealth. In reality what is required is sufficient return to maintain the real value after tax and inflation. If you look carefully, there are more ambitious funds delivering good returns. This is good news for investors looking to diversify away from equities and bonds yet still achieve their longer term objectives. We are, however, approaching the point where it will become clear that a number of the funds launched in recent years will either disappoint investors with poor returns and suffer redemptions, or never reach critical mass and be closed down by the manager.

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