UCITS Hedge Platform Survey 2012 Building routes to a new investment market place or alternative funds that conform to the Undertakings for Collective Investments in Transferable Securities or UCITS format 2012 may prove a turning point. It could be the year that alternative UCITS funds ramp up assets drawn from retail investor networks, cracking open a lucrative new avenue for growth outside of the institutional investor sector. No one expects retail flows to surpass institutional flows to alternative UCITS quite yet. But the question of whether alternative UCITS, sometimes dubbed Newcits, can thrive in the retail market and in the distribution networks that serve such investors is likely to be answered one way or the other over the next year or two. The alternative UCITS market has been shaping up for this test since Merrill Lynch began to sign up hedge funds to its Investment Solutions platform over five years ago. Since 2005, assets under management have doubled to around €75 billion (See Fig.1) after early rapid growth in alternative UCITS. This followed the introduction of the updated UCITS III provisions in 2001 which permitted the use of some basic hedge fund investment techniques, including moderate leverage, short selling and derivatives exposure. Following the wide spread gating that took place in the post-2008 credit crunch, the UCITS provisions giving minimum 15 day liquidity suddenly looked appealing and had the virtue of addressing a key investor concern. Alternative UCITS evolving Even so, this is a sector still in a relatively early phase of evolution. Our own UCITS Hedge database tracks over 500 funds compared with over 10,000 in the offshore sector. Moreover, regulation of this new market is developing as the European Securities and Markets Authority is holding a consultation on UCITS. Though this is cloaked as an examination of exchange traded funds and structured UCITS, it is clear that several aspects of the Newcits phenomena are being scrutinized closely. This is also the case with continuing deliberations on the part of the French regulator, the AMF. Some changes in how UCITS operate are probably inevitable even if the broad approach that has developed is maintained. “The regulatory authorities are focusing on the migration to UCITS IV,” says Florent Josset, head of Nomura Alternative Investments Group. “I don’t see that directly affecting alternative UCITS. Some of the debate around index structures and synthetics, especially regarding synthetic and physical ETFs, will continue but shouldn’t lead to fundamental issues for UCITS.” What seems clear is that there will be no turning back from an increasingly pan-European, onshore asset management sector using reasonably sophisticated portfolio management tools. The commercial advantages UCITS offer, chiefly transparency and liquidity, are appealing to new market segments both in terms of geography and client type. Not only have alternative UCITS fund structures thrived in Europe, their seal of approval now extends to investors in the Middle East, Asia and Latin America. This is attracting the attention of alternative fund managers, notably in America and some emerging markets. “In my view, UCITS is increasingly becoming an attractive investment vehicle for many investors, who appreciate the enhanced liquidity, transparency and regulatory oversight that the structure has to offer,” says Roman Rosslenbroich, CEO, Aquila Capital. “At Aquila Capital, we recognized the advantages that UCITS offers both managers and investors very early on. We converted our AC Risk Parity Fund to a UCITS structure in 2008, making it one of the first absolute return UCITS funds available in the market. Since then, we have seen significant inflows into our UCITS fund range, with our AC Risk Parity strategy recently reaching assets under management of over €1.3 billion.” New platform providers The UCITS sector’s quickly growing horizons attracted some big new entrants to the market in 2011. Goldman Sachs International launched a platform for external managers in the third quarter which now has three funds. With the entrance of the leading hedge fund prime broker to offshore funds, it would appear that the UCITS market is primed for further expansion. Indeed, several funds have been conspicuous by their success with each getting to $1 billion in AUM and beyond: Winton Capital (DB Platinum platform), Aquila Capital (Alceda platform) and York Capital (Merrill Lynch Investment Solutions). Other investment banks have entered the fray, notably, UBS which acquired the Luxembourg Financial Group platform in mid-2011. Post-integration of LFG, UBS is gearing up for a renewed push into UCITS later in 2012, says Mike Fullalove, the bank’s global head of alternative fund distribution. He adds that the refocusing of the UCITS strategy at UBS will result in additional managers and strategies being launched on the platform later this year. Helping managers adapt Managers of hedge fund investment strategies are accustomed to advising lightly regulated offshore funds. In comparison, the legal and custodial structures for the onshore hedge fund strategies via UCITS are more circumscribed. Consequently, there is much learning and adaptation required to tap the emerging investor appetite for UCITS compliant investing. The ready solution for managers and investors is the UCITS hedge fund platform, of which around 20 are on offer. “For investors one attraction of investing via a platform is the additional risk oversight,” says Alex McKenna, head of fund structuring, at Deutsche Bank, which runs the db Platinum UCITS platform. “Deutsche Bank is a trusted institution and has a great deal of experience with hedge funds and alternative investments. Investors see the platform environment as a well controlled environment. Deutsche Bank has the platform to meet the highest standards within that regulatory framework.” For investors, the UCITS format for hedge funds strategies offers particular benefits. These include: regulated standards of operation and oversight; formal controls on counterparty risk; an open- end fund structure with frequent dealing and UCITS Hedge Platform Survey Building routes to a new investment market place BILL McINTOSH F Fig.1 Estimated assets under management in UCITS-compliant hedge funds (EUR) Source: UCITS Hedge 90 80 70 60 50 40 30 20 10 0 01-Apr-05 01-Aug-05 01-Dec-05 01-Apr-06 01-Aug-06 01-Dec-06 01-Apr-07 01-Aug-07 01-Dec-07 01-Apr-08 01-Aug-08 01-Dec-08 01-Apr-09 01-Aug-09 01-Dec-09 01-Apr-10 01-Aug-10 01-Dec-10 01-Apr-11 01-Aug-11 01-Dec-11 AUM (€ BILLIONS) U C I T S P L A T F O R M S U R V E Y 2 cost-effective, even when highly complex issues are involved,” says Hamid Parsa, Director of Business Development at Alceda. “Whether a client is looking to launch an alternative investment absolute-return or long-only fund, Alceda is able to complete the process of setting up a UCITS fund within a period of six to eight weeks.” Reaching investors Getting a fund onto a platform and approved by regulators is, of course, just one factor that managers face in selecting a platform. Cost efficiency and speed to market are particularly important in the early stages of a fund’s life. This is notably true of the UCITS sector where managers are keen to get products before investors at a time when growth is high and first mover advantage is tangible. However, once a fund is up and running distribution takes on primary importance. With the growing adoption of UCITS in places as far flung as Chile and South Korea, the value of having global distribution networks to institutions commensurate high fund liquidity; and increased transparency through mandated reporting and risk measurement processes. UCITS adds complexity For hedge fund managers, these very attributes of a UCITS product introduce challenges. There is the need to register with another regulator, most often in Luxembourg or Ireland. In addition, more parties are needed to run an onshore fund (notably the custodian as well as the administrator), while there are also increased burdens on operations, compliance, marketing and to some extent the investment staff of the investment advisor. Having a turnkey solution to handle these matters is the key attribute of any platform. At Swedish investment bank SEB, EFA acts as the administrator, while the bank itself is global custodian. With pre- approved service providers, a fund can be up and running on the SEB Prime Solutions UCITS platform in three to four months compared to the year a manager might need to launch independently, says Peter Herrlin, client executive for European hedge funds with SEB’s prime brokerage unit. “For us it is very much a part of our prime brokerage offering.” Freedom of Choice Among the platforms, there is substantial variation. Some platform sponsors, like SEB, Merchant and Matrix, are agnostic about what choices investment managers make by service function. The choice of prime banker (that is the onshore equivalent of prime broker) is typically unrestricted. As a rule, the fund manager can extend the existing prime brokerage relationship for the offshore fund to the onshore product. In some cases, investment banks have set up a UCITS platform to satisfy prime services clients with offshore hedge funds. Sometimes the fund manager has a strong banking relationship that can influence the choice of custodian. However, it is often the case that the choice of administrator and custodian is more circumscribed than the choice of prime broker/banker. In some cases, the selection of an administrator or custodian may be proscribed by the particular domicile where a fund platform has been set up. So a platform sponsor with a history of activity in Ireland, like Lyxor, for example, will find it natural to select a Dublin based administrator and custodian with a strong presence there. Similarly Alceda, which has a business background in Luxembourg, finds it natural to line up administrators and custodian banks with a presence and understanding of working in Luxembourg. “Our long-standing experience in structuring both alternative and traditional investments ensures that our fund set-up process is timely, efficient and is substantial. And as a number of respondents to this survey indicated, moves to develop distribution to retail investors are being ramped up. “Using a UCITS platform’s marketing networks is key since it is better to market under a well known platform as it gives extra credibility,” says Apostolos Avlonitis, portfolio manager of RP Capital Group which recently launched the RP Systematic Emerging Markets UCITS Fund on ML Capital’s Montlake platform. He also cites the advantages of a cheaper initial set up and more efficient regulatory application process since platforms have professionally trained UCITS staff with knowledge of compliance and risk management procedures. Growing quickly One of the faster growing platforms in 2011 is the FundLogic offering run by Morgan Stanley. Several fund managers have embraced its strong European distribution capabilities. At the same time, the platform has appealed to investors’ appetite for diversification by enlisting a growing range of managers, many of whom are outside of Europe. “For hedge fund managers, FundLogic offers a completely outsourced and turnkey solution enabling them to tap into the UCITS market while benefiting from Morgan Stanley’s unique distribution capabilities, including institutional investors and intermediaries,” says David Armstrong, the investment bank’s Global Head of Fund Linked Products. “To investors, we provide a comprehensive range of highly skilled investment managers. We believe our edge lies in our ability to offer a large “The regulatory authorities are focusing on the migration to UCITS IV,” says Florent Josset, head of Nomura Alternative Investments Group. “I don’t see that directly affecting alternative UCITS. Some of the debate around index structures and synthetics, especially regarding synthetic and physical ETFs, will continue but shouldn’t lead to fundamental issues for UCITS.” UCITS Platform Operators • Alceda Fund Management • Lyxor Asset Management • Deutsche Bank Platinum • Merrill Lynch Investment Solutions • Universal – Investment • Schroder GAIA • Morgan Stanley FundLogic Alternatives • UBS Liquid Alpha • Matrix • SEB Prime Solutions UCITS • Merchant Capital • Montlake UCITS • Goldman Sachs International • Nomura • Prodigy Capital Partners U C I T S P L A T F O R M S U R V E Y 3 lifeline even though some strategies weren’t suited to it. That accounted for the big flurry of launches. But we are strong believers in the continuity of growth in the UCITS market. I can’t see a scenario where the UCITS market will become diminished.” Managers more discerning It is probably no bad thing that fund managers have become more discerning about the suitability of a strategy to the UCITS framework. Bubbles beget busts. With memories of 2008 still fresh a more considered approach to the sector’s development is in the interests of managers, platform providers and, of course, investors. Merrill Lynch, now Bank of America Merrill Lynch, was the first investment bank to launch a UCITS platform. BAML is continuing to build its fund offering even though it has come through the initial growth phase that newer platform providers are still experiencing. “We are continuing to broaden our offering to diversify our product range,” says Miriam Muller, head of BAML’s fund platform group. “The mandates in the pipeline will take us beyond 20 funds and we have said the optimal number is 25 to 30 funds. We have reached critical mass and have a broad selection of strategies available to investors.” Regulation evolving Several regulatory changes will impact the evolving UCITS landscape in 2012. Platform operators have until mid-year to finalise Key Investment Information Documents or KIIDs. Operators will also be studying the advent of UCITS V and whether they will incur higher costs from assuming custodian responsibilities and related liabilities. Perhaps the biggest change, however, is the retail distribution review or RDR that comes into effect in the UK at the year-end. Under RDR, third party marketers, notably IFAs, will charge a direct advisory fee from investors instead of taking an upfront fee. “It will become clear what investors are paying to whom and how much,” says BAML’s Muller. “We think that will level the playing field to the extent that there will be greater transparency on fees and more emphasis placed on fund quality for the end investor in terms of the various competing products.” The timing of RDR may dovetail with the evolution of alternative UCITS to seek retail channels to market. Certainly, the growth in alternative UCITS platforms has resulted in a number of operators coming into the market to focus exclusively on tapping the retail investor opportunity. Here the approach of Merchant Capital, which has acquired a network of 120 IFAs, is instructive. “We see the opportunity number of US based investment managers under our unique platform, allowing investors to obtain a diverse range of investment exposures by accessing a wide range of managers under one fund umbrella.” Land grab slows With 2011 just completed two data points in the UCITS sector stood out. First, not only hedge funds but also UCITS funds lost money. But the performance of the onshore sector was far less volatile. The UCITS Hedge Index ended 2011 with a drawdown of 4.55% compared with an 8.87% fall for the offshore bellwether HFRX Global Hedge Fund Index. The second data point is that new launches for alternative UCITS funds in 2011 fell below the levels recorded in both 2009 and 2010. Indeed, launch volumes in 2010 were approximately double the levels recorded during the past year. Several reasons may help explain this. First, there is some evidence that the three main UCITS strategies – long/short equity, managed futures and macro – had already seen fund origination outpace capital allocation. So a slowdown in line with a falling off in investor commitments was understandable. There is also anecdotal evidence that some managers delayed setting up new UCITS funds to concentrate exclusively on steering existing funds through a highly difficult market environment. “There were a lot of funds that weren’t as successful as they would want to be,” says George Cadbury, head of Merchant Capital’s UCITS umbrella for alternative funds. “Some managers saw UCITS as a for UCITS being the retail market,” says Cadbury. “It is very much an educational drive. Many IFAs are unaware of the opportunity in UCITS,” he says, noting that market volatility underlines the attractions of hedge funds as risk managers. “We are hoping to change this sentiment a little bit and offer a better alternative.” One noteworthy success in the retail UCITS market is BlackRock UK Absolute Alpha, which has taken in over $4 billion. Another is Schroders GAIA Egerton European Equity, which has attracted over $600 million from investors who like its success in achieving better than equity- type returns with less risk. “Schroders is a very reputable asset management firm with a high quality product offering and distribution,” says Jeff Blumberg, CEO of Egerton Capital, which manages the fund. “Our collaboration with Schroders thus far has been seamless and, most importantly, a success for our mutual clients.” Given these successes and the fact that around $8 trillion is invested in the UCITS market, overwhelmingly in long only funds, it’s clear the opportunity for Newcits is palpable. Perhaps nowhere is this more the case than in Germany. Not only is it Europe’s biggest market, it is one where alternative fund investing has been hampered by both the business culture and tax provisions. But German platform operators like Alceda and Universal-Investment have made great strides in “We are strong believers in the continuity of growth in the UCITS market. I can’t see a scenario where the UCITS market will become diminished” says George Cadbury, head of Merchant Capital’s UCITS umbrella. “One thing we offer managers is the whole hearted backing of our distribution network,” says Gavin Ralston, global head of product with Schroders. ”We sell these funds as if they were Schroder funds. We have strong distribution of UCITS.” U C I T S P L A T F O R M S U R V E Y 4 For some specialist UCITS platform operators, securing distribution lines is a function of setting up ties with specialist teams targeting specific investor niches. ML Capital, the operator of the Irish- domiciled Montlake UCITS platform, has cemented a significant distribution agreement with Acolin Fund Services of Zurich. It will provide managers on the platform with access to several hundred banking groups across the German and Swiss marketplaces. Establishing distribution “The market is clearly recognising the vital importance of distribution which a well placed UCITS platform can deliver,” said John Lowry, chairman of ML Capital. “The deal with Acolin will further enhance our competitive position as these distribution deals can often take a year or more to structure. We are currently also in discussions with a number of distribution partners and private banking groups in Latin America and Asia, which are experiencing significant demand for alternative UCITS products.” He bringing alternative fund products onshore to the country’s huge investor community. “We will see a lot of new asset managers from overseas offering well established successful strategies for German investors,” says Stefan Klein, an executive in investment product management with Universal-Investment. He cites the US and Scandinavia, among others, as among the main centres for Newcits managers now marketing to German investors. Klein confirms that the Alternative Investment Fund Manager Directive, even though it doesn’t take effect presumably until mid-2013, is having an impact on the Newcits market. “AIFMD is mainly having a positive effect because we see many offshore managers coming onshore now,” he says. “Sometimes it is hard to handle all the issues, but net, net it has had a positive effect.” Luxembourg and Ireland have attracted most of these funds, but Germany, the UK and new centres in Malta and Gibraltar are also gaining funds. The main emphasis on some UCITS platforms falls squarely on distribution. With Matrix Group, for example, there is more flexibility for managers to come on board with their own service providers and the partnership with funds is a genuine two way process. “The main thing is the breadth of the distribution channel,” says Luke Reeves, a director with Matrix and head of retail and institutional business development. “We can work with existing teams as appropriate. Quite a lot of the groups we work with have their own sales teams. But we can be complimentary and work with them to develop different sales channels.” A network effect Some of the UCITS platforms are being run by big institutional fund management groups combining internal and external funds. External managers on such platforms get highly visible brand recognition and global scale. At Schroders, the three funds on the platform advised by external managers come from very prominent hedge fund firms: CQS, Egerton Capital and Sloane Robinson. Indeed, Schroder GAIA Egerton European Equity has raised over $600 million since inception in November 2009. “One thing we offer managers is the whole- hearted backing of our distribution network,” says Gavin Ralston, global head of product with the fund manager. ”We sell these funds as if they were Schroder funds. We have strong distribution of UCITS not just in Europe but in Asia and Latin America. We can position UCITS funds to be sold globally.” sees demand for alternative UCITS growing in some of the classic hedge fund strategies, notably global macro and managed futures along with a renewed interest in global emerging markets strategies. The growing interest in the UCITS sector among investors is seeing some start up managers consider launches early in a fund’s life cycle. Many of the funds on the more established platforms proved themselves initially offshore before evolving a UCITS offering in the last few years. It means they have a substantial investor base and commensurate financial resources. But with start-up and emerging managers resources are likely to be more limited. For them, a UCITS wrapping with a pared down cost base may prove to be very attractive. A soon-to-launch UCITS platform from Prodigy Capital Partners is aiming to address this market. Prodigy is awaiting regulatory approval for an umbrella structured Luxembourg SICAV, which will host its merged UK UCITS and Cayman emerging market fund. When the platform is established in the coming months, a fund will be able to launch in UCITS format for a one-off flat fee of circa €25,000 (as well as avoiding the typical repeating share of the management fee that other platforms charge). That will cover start-up costs, local fees, directors and audit. Citi is tasked with being the depositary and custodian, with Andbanc the administrator. “There are quite a number of small start-up fund managers wanting to get a UCITS,” says David Robinson, managing principal and portfolio manager with Prodigy. “They want to focus on raising money rather than spend time going through the UCITS setting-up process on their own. We have gone through this process and now we can offer the same to a manager with minimal pain or interruption. We think there may be people who want to join our syndicate and share the costs, which are extremely competitive and attractive to small and mid-sized funds.” The cost savings come from combining small managers to create economies of scale. The managers maintain complete operational freedom—unlike large bank platforms, a fund won’t be tied to any particular provider for, say, swaps or other business needs. Instead, the aim is to ensure that individual fund managers aren’t subsumed in a vastly bigger entity, enabling them to build their own brand equity and evolve their businesses as required. “The beauty of this concept is low cost, tremendous speed and flexibility combined with own branding and ownership,” says Robinson. “Once set up, a new manager can focus on building their business and selling their fund.” THFJ “There are quite a number of small start- up fund managers wanting to get a UCITS,” says David Robinson, of Prodigy. “They want to focus on raising money rather than spend time going through the UCITS setting-up process on their own. We have gone through this process and now we can offer the same to a manager with minimal pain or interruption.” U C I T S P L A T F O R M S U R V E Y 5 ntrepreneurs invariably are motivated to build a company when they are unable to find an existing offering in the market that satisfies their needs. From making this discovery to taking the initiative to fill this market gap is often just a small step. Originally, Alceda Fund Management S.A. set up private label funds (for clients such as family offices) who wanted to put their own brand on fund products. From these small beginnings the business has evolved substantially as filling one market gap opened up views of others. Established in Luxembourg in 2007, Alceda has grown to become a leading independent structuring specialist providing institutional investors, asset/fund managers, banks and family offices with tailored investment solutions. It has assets under administration of $7 billion. The Alceda UCITS Platform (AUP) supports $4.5 billion in a broad range of UCITS funds. The single best resource is the 65-strong team based in Luxembourg, the depth and breadth of which serves the firm well in the setting up and operational phases. As a specialist in structuring there is a significant legal/set-up team, a risk team and an operations team to handle pre-trade and post-trade controls. The team’s scale will be a big plus when the next wave of regulatory change hits. Smaller competitors may struggle with limited personnel to adapt to the increased demands of UCITS IV and UCITS V, for example. As a member of the Aquila Capital Group, Alceda has grown out of an asset management company. The UCITS offering is as flexible as those on any platform, giving life to the firm’s tag line: ‘Tailor-Made Structuring Solutions made in Luxembourg’. Whilst many platform providers profess agnosticism to which service providers managers chose, the phrase ‘open architecture’ is well applied when it comes to Alceda. Managers coming on to the platform have genuinely free choices for the role of fund administrator, custodian bank, prime brokers (swap providers) and auditors. According to Hamid Parsa, Director of Business Development at Alceda, this flexibility is necessary to fulfil the corporate philosophy that the form should follow the function. “We shape the product for what is best for the investment strategy, not the other way round.” He says this is only possible because of the team experience in structuring and in the design of different investment vehicles – a real asset for managers coming onto the platform now. He adds: “What sets us apart is our ability to bring managers’ investment ideas to the market as they originally intended them. For example, if certain strategies do not fit the UCITS format, Alceda has also the capability to offer other structuring solutions, such as SIF vehicles. In working with Alceda managers do not have to curtail their investment objectives or compromise the strategy’s risk-return profile.” Alceda has a three step process to bring funds onto the platform (see Fig.1). From initial consultation to fund launch can be as short as six to eight weeks. If time-to-market is an important factor for an investment manager using an experienced and expert guide is imperative. Clients are supported by a client advisory team during the entire lifetime of the products, and a dedicated project manager works with the clients through each stage. Setting up a UCITS fund independently can be costly and time consuming for a manager unfamiliar with the ways of the CSSF. For small to medium- sized managers, who often do not have the same operational set-ups and resources that the big players have, it makes sense to join a platform like AUP, which offers them a ready-made advantage. The platform handles all aspects involved in the product launch, thereby enabling the fund manager to focus on their core competency of return generation. Once a manager is on AUP launching a second fund is very easy. Alceda employs a standalone structure, which gives each new fund its own individual fund umbrella. As a consequence, the funds on AUP are completely independent. An additional fund can be in place in a few weeks. A one stop shop “We aim to provide a full range of services under one roof – a one-stop shop for bringing funds to market, if you like,” says Parsa. Alceda has developed a lot of the technology itself instead of outsourcing as much as possible, the route which most platform providers take. “This should provide efficiencies to the client in setting up. We provide a seamless vehicle for fund managers to run their own UCITS funds, and for small-to-mid-size firms we can be very competitive.” Alceda is looking to grow the distribution capabilities it can deploy on behalf of funds coming onto the platform. It uses a hybrid approach, having a dedicated third party distribution team for sales in Alceda Fund Management Independent platform advances open architecture SIMON KERR E Fig.1 Alceda Fund Management’s 3 step process to fund launch Step 1 Step 2 Step 3 6 - 8 weeks later Initial consultation/ meeting Check feasibility of strategy Due diligence Prepare a quotation • Your new UCITS fund • Decision-making Drafting fund documents Conception of marketing & distribution strategy • • • Face-to-face meeting in Luxembourg or at your office Defining your requirements Clarifications of trade details • • • • • • Source: Alceda Fig.2 Investment Strategy Macro Discretionary 16.7% Macro Systematic 16.7% Fund of Funds 33.3% Relative Value 33.3% Source: UCITS Hedge U C I T S P L A T F O R M S U R V E Y 6 AUP span a broad range of strategies, including long short equity, global macro, CTA, multi strategy, fixed income and emerging markets. Five Newcits funds launched on the platform in 2011. “Managers want to enter the UCITS world to tap into different sources of capital than feed into their offshore funds,” says Parsa. “We can help them do that.” Alceda Fund Management sees its independence as a virtue. No tie is dominant making for truly open architecture. The individual fund umbrella approach can offer both fast time- to-market and risk containment, while the team’s experience ensures smooth execution for clients. THFJ the UK and Germany. In addition, Alceda provides comprehensive distribution capabilities, ranging from a sales and marketing service to organising dedicated road shows and events. It has even drummed up media coverage and put together timetables for one-on-one meetings with investors. Alceda’s distribution efforts not only focus on Germany, where distribution channels include institutional investors such as pension funds, insurance companies and saving banks as well as distribution platforms, but also reach the UK and Asia. About $2.5 billion of the funds under administration on the Alceda platform are in Newcits funds, a strong area of growth for the company. The funds on the Daily 83.3% Weekly 16.7% Fig.4 Liquidity Source: UCITS Hedge UK 16.7% Rest of Europe 16.7% Germany 66.7% Fig.3 Manager location Source: UCITS Hedge “We shape the product for what is best for the investment strategy, not the other way round.” U C I T S P L A T F O R M S U R V E Y 7 CITS hedge platform providers make great play of the time to market advantage that they can confer on their clients. And indeed the platform sponsor can be so adept at their own part of the process (and in co-ordinating the work of other advisors and other service providers) that the project management element of getting to the point of launch is often well executed. So the UCITS hedge fund can be brought to market promptly. Lyxor, the asset management business owned by Société Générale of France has emphasized how long it has taken them to get to the point of starting their own platform for alternative funds in the UCITS format. “It took us over a year to launch our UCITS hedge platform, which we call Lyxor Dimension,” explains Nathanael Benzaken, Lyxor’s Head of Managed Account Development, “because we wanted to make sure that we structured it in the right way. Also we wanted to make it scalable, i.e. to have the infrastructure in place and the capability to add funds relatively quickly.” It could not have been the specific knowledge that was lacking – Lyxor has been in the hedge fund business for 13 years, and has a fund of funds operation, structuring capability specifically related to hedge funds, a hedge fund index family of products and the well-know managed account platform business. Conceptually Lyxor are coming at running a platform for UCITS hedge funds differently from most providers. “We take the view that a UCITS hedge fund is still a hedge fund,” expounds Benzaken. “We are bringing hedge fund strategies into the UCITS arena with the objective to deliver genuine hedge funds capable of delivering a strong value proposition for investors while limiting the potential performance drag from the UCITS constraints. To achieve this, we focus on managers with a strong investment proposition focusing on alpha generation.” To reinforce the emphasis Lyxor puts on parity between onshore and offshore hedge funds, if the UCITS version of a given hedge fund would be a pale copy of the strategy, Lyxor would pass on that strategy, “because in the end it will disappoint investors” explains Benzaken. Lyxor has developed a range of UCITS hedge fund index products which are based on the platform, and has a number of UCITS funds of hedge funds on Lyxor Dimension. There is a Lyxor Absolute Return Fund on the UCITS hedge platform, too. Illustrating Lyxor’s vision of what a UCITS hedge platform should seek to do, the first external manager on the platform is the Lyxor/Old Mutual Global Stat Arb Strategy Index Fund which was launched in August. Statistical arbitrage strategies seek to generate alpha by exploiting short- term liquidity mis-pricing through a very liquid, very diversified global equity market neutral approach. Lyxor found a way to put the full investment strategy into the UCITS format without tweaking the strategy at all. “This is a pure hedge fund in a UCITS wrapper,” claims Benzaken. The Lyxor/Old Mutual Global Stat Arb Strategy Index Fund gives access to a global market-neutral equity fund, which has very low correlation to the equity market, and at the same time is extremely liquid. The Lyxor view is the UCITS hedge fund universe needs more of these managers focusing on alpha generation and lower correlation. Lyxor’s objective is to add more managers that qualify with these criteria to the platform; that is to carry on putting good hedge funds in a UCITS wrapper. Whilst Lyxor has over a hundred hedge funds on their offshore managed account platform, their ambition for Lyxor Dimension, the UCITS hedge platform, is to on-board 10-12 new funds over the next year. Clearly, management expects to be very selective for a while yet. Having the tools Lyxor, as a long standing investor in hedge funds, believe it has the tools to be appropriately selective. Lyxor has an embedded investment culture. It has 10 analysts of hedge funds and has the software toolkits to analyse hedge fund portfolios and break down the risk attributes. The firm also has a tried and tested Lyxor Asset Management Combining the elements to industrialise the process SIMON KERR U Fig.1 Investment Strategy Macro Discretionary 6.3% Fund of Funds 87.5% Relative Value 6.3% Source: UCITS Hedge Fig.2 Number of funds Internal Funds 87.5% External Managers Funds 12.5% Source: UCITS Hedge U C I T S P L A T F O R M S U R V E Y 8 to play. There are more than 25 sales staff at Lyxor, which senior management described as “based on all the continents.” In addition Lyxor has a client service team and its own marketing team. On top of direct sales Lyxor utilizes contacts with other distributors, such as networks set up by asset managers and private banks. These are existing relationships that have matured through work on other Lyxor products, which are themselves hedge fund related. A large proportion of the potential capital flows will come from the likes of insurance companies and pension funds. After that the most significant source of demand will be from private banking customers, according to Lyxor. Another potential source of interest could be funds of UCITS hedge funds, according to the French alternatives specialists. due diligence process; and knows how to recognize style drift. According to Lyxor, this is what is missing from the approach of many of those running platforms for UCITS hedge funds – an understanding of risk management and the investing side. The upcoming period is a busy one for scheduled fund launches. Lyxor has just added two new funds at the of January. Management’s intention is to broaden the Lyxor Dimension offering first by adding funds that offer a range of investment strategies. The planned launches encompass a short-term CTA run by IKOS, and a long-term CTA fund, an emerging markets- focused CTA operated by Caxton and an event driven fund. Lyxor is currently meeting managers who run equity long/short and event driven strategies in various markets, looking for suitable candidates. A constraint, limiting the number of funds/strategies suitable for putting in a UCITS wrapper, is scalability. “The market for UCITS as a whole is a large market and UCITS hedge funds are a growing part of it, and we have to secure enough capacity with a manager to meet the potential demand,” explains Lyxor’s Head of Managed Account Development. When it comes to distribution, a capability which is a highly ranked factor in platform provider selection by managers, Lyxor Dimension has a strong hand Lyxor’s mindset in structuring UCITS hedge funds – a real hedge fund in an onshore wrapper – is different from most platform providers. The firm has put its own in-house products on the platform first to iron out the wrinkles of a start-up operation before welcoming externally managed funds. The first externally managed fund on Lyxor Dimension is in a strategy that some platforms may struggle to work with, demonstrating the technical proficiency of the platform. On top of that the distribution capability is bigger than most in direct sales staff, and the marketing capabilities go well beyond that. Whilst the high quality infrastructure has yet to be tested by a mass of external managers, there are strong elements in place for Lyxor Dimension to realize the ambition to industrialise the processes of a UCITS hedge platform for manager clients and investors alike. THFJ Table 1 Service Providers for Lyxor Dimension UCITS Hedge Platform Source: Lyxor AM Fund Domicile Custodian Administrator Prime Broker Majority of Dimension Fund domiciled in Luxembourg; Single Manager Funds domiciled in Ireland CACEIS (part of the Credit Agricole Group) for most funds CACEIS (part of the Credit Agricole Group) for most funds Wide Range (over 10 available) Fig.4 Liquidity Weekly 15.4% Daily 84.6% Source: UCITS Hedge Fig.3 Manager location New York 6.3% Paris 87.5% London 6.3% Source: UCITS Hedge U C I T S P L A T F O R M S U R V E Y 9 n alternative UCITS platform needs to offer a range of investment strategies to build a diversified offering to attract a broad selection of investors over time. Deutsche Bank, including a wide range of internal funds, offers such diversity with around 70 funds. But even in the midst of such a wide offering, stretching across Newcits and absolute return products, one fund stands out. It is the DB Platinum IV dbX Systematic Alpha Index, driven by Winton Capital’s managed futures strategy, which leads Newcits funds with over $1.6 billion AUM. This has helped Deutsche Bank take the top slot amongst platform operators with AUM of nearly $2.49 billion according to our UCITS Hedge database. It demonstrates the scope that there is for successful asset raising,” says Alex McKenna, head of fund structuring, at Deutsche Bank. “We are looking to build on that.” If 2011 is any guide – when the platform added alternative UCITS from Paulson & Co., Omega Overseas Partners and Sloane Robinson – the New Year will see DB Platinum sign up more top-ranked managers. 14 UCITS Hedge Funds DB Platinum IV QCM GDP Index Fund DB Platinum Tosca Mid Cap Equity Fund DB Platinum IV dbX Millburn Multi-Markets Index DB Platinum FX Concepts Global Currency Fund DB Platinum IV dbX Systematic Alpha Index DB Platinum V Hermes Absolute Return Commodity DB Platinum AIMhedge Index DB Platinum IV Ikos FX Fund DB Platinum IV Lynx Index DB Platinum IV Paulson Global DB Platinum Traxis Global Equity Macro DB Platinum Sloane Robinson Asia DB Platinum Omega DB Platinum IV Fortinbras PRISM Index Deutsche Bank Platinum UCITS Hedge Platform Survey 2012 A Fig.4 Investment Region Global All 69.7% Global Emerging 3.0% Europe All 3.0% Asia All 3.0% Global Developed 9.1% Europe Developed 12.1% Fig.2 Liquidity Weekly 33.3% Daily 66.7% Source: UCITS Hedge Fig.3 Manager location London 81.8% New York 12.1% Stockholm 3.0% Liechtenstein 3.0% Source: UCITS Hedge Fig.1 Investment Strategy Long/Short Equity 9.1% Relative Value 12.1% Fund of Funds 12.1% Macro Systematic 42.2% Multi-strategy 9.1% Event Driven 6.1% Macro Discretionary 9.1% Source: UCITS Hedge U C I T S P L A T F O R M S U R V E Y 10 [...]... ensure that many alternative UCITS managers will be clambering to come aboard The fund manger’s links to private banks and institutions will ensure that managers who do make the grade have a solid opportunity to attract allocations Fig.3 Manager Location 3 UCITS Hedge Funds Source: UCITS Hedge Schroder GAIA Egerton European Equity Schroder GAIA CQS Credit Schroder GAIA Sloane Robinson Emerging Markets... Energy UCITS Fund G&P Orca UCITS Fund George Cadbury, founder of Merchant Capital, says retail investors need to be educated about the advantages of alternative UCITS since hedge funds are generally better risk mangers in down or volatile markets Merchant has acquired a UK network of independent financial advisers That should help get the message of alternative UCITS to a much broader retail audience 4 UCITS. .. groups across the German and Swiss marketplaces Montlake is also looking to get distribution with private banks in Latin America and Asia where demand for alternative UCITS is high The MontLake UCITS Platform is in the process of adding additional managers Along with a concerted effort in distribution, ML Capital is targeting a rise in AUM to beyond $500 million later this year 5 UCITS Hedge Funds MontLake... that augers well for the MLIS platform is the marquis quality of several if its funds Among these well regarded managers are event driven specialists York Capital, multi-strategy giant Och-Ziff as well as Marshall Wace and AQR Such funds are still attracting assets from an institutional investor base Fig.2 Liquidity Source: UCITS Hedge Daily 26.3% Another factor in the platform s favour is the gravitational... one is a global fixed income strategy Macro Systematic 100.0% 17 “We don’t want to launch too many new products,” says Florent Josset, head of Nomura Alternative Investment Funds The key is what happens over the next three to six months and what that does to investor behaviour We will want to stagger new launches based on investor appetite Volatile markets like this make it impossible to plan.” banking... distribution pact with Acolin Fund Services of Zurich, which will provide managers its platform access to several hundred Goldman Sachs International Proof that the alternative UCITS market is developing strong foundations came last summer when Goldman Sachs launched a UCITS platform Each fund manager is able to trade its own strategy, as set out in sub-fund documents, using the infrastructure of the platform, ... providers such as custodian, administrator and auditor Relative Value 33.3% Investment Strategy Goldman set up the platform after prime brokerage client GLC inquired about setting up a UCITS product Goldman has run a UCITS business Nomura Nomura is planning the launch of several funds on its Enovara Irish-domiciled UCITS platform during 2012 The first one is a Japanese focused long/short equity strategy The... Pegasus UCITS Fund MontLake Dunn WMA UCITS Fund MontLake Skyline UCITS Fund Montlake Goldwinds Global Macro UCITS Fund Montlake RP Systematic Emerging Market UCITS Fund since 2007 which has attracted over $3 billion in assets, but only markets internal funds to external investors In early 2012 Javelin Capital, a London-based emerging markets equity hedge fund firm backed by Majedie Investments, launched... launched a UCITS version of its fund on the Goldman platform The launch takes assets on the platform to around $100 million Given Goldman’s appetite for growth, it would seem that the UCITS platform is likely to see rapid growth in the next few quarters 3 UCITS Hedge Funds GLC Gestalt UCITS Fund GLC Global Macro UCITS Fund Javelin Capital Emerging Markets Alpha Fund The chief characteristic of new UCITS. .. renewed push into the alternatives and UCITS sectors later this year The refocusing of the UCITS strategy is expected to see additional managers and strategies joining the platform Daily 100% The reconstituted UBS Liquid Alpha has deep expertise in tax and regulatory structuring, providing integrated solutions for risk management, custody and liquidity The platform will increasingly host an array of diverse . scalability. “The market for UCITS as a whole is a large market and UCITS hedge funds are a growing part of it, and we have to secure enough capacity. retail market with alternative UCITS products. Overseas in Asia and South America the retail UCITS market has taken off and it is expected that the same