LUXEMBOURG/DUBLIN/LONDON, May 11 /CNW/ - Burgeoning interest from hedge
fund managers in developing or replicating alternative investment
strategies within UCITS products has put these funds in the spotlight.
Alternative UCITS are not new, nor do they operate under a separate
regulatory environment, they are funds are wrapped in traditional UCITS
structures -- but there are five key factors to consider for a
successful alternative UCITS fund.
Pick your strategy - RBC Dexia's analysis shows that hedge funds strategies representing
90% of all Cayman invested assets can be replicated within the UCITS
format. During the first half of 2010, the company analysed the
requirements of the UCITS structure, including the types of instruments
requiring counterparty risk management, with Cayman hedge fund
strategies. Only a small minority of hedge fund strategies are so
esoteric that they cannot be replicated under UCITS.
Location, location, location-Selecting the right domicile for an alternative fund depends on
the investor segment being targeted and the preferred infrastructure.
Both the Qualifying Investor Fund (QIF) in Dublin and Luxembourg's
Specialised Investment Fund (SIF) benefit from well-informed investors
and private placement distribution, while pan-European UCITS funds
focus on retail investor protection and have more restrictions on
investment and borrowing restrictions.
Think liquidity - UCITS funds come with greater liquidity requirements than traditional
hedge funds. While this can be assessed and navigated when setting up a
fund, it is crucial that it is stress-tested for scenarios under which
markets seize up, as they did following the Lehman default. On paper, a
UCITS fund can have bi-monthly liquidity. In reality, many investors
expect daily liquidity. All UCITS actors - investors, custodians, hedge
fund managers, fund promoters -should carry out assessments to ensure
that funds respect their liquidity ratios.
Remember operational risk-Fund s that apply a hedge fund strategy in UCITS vehicle do so by
changing the model from physical to synthetic prime brokerage and the
instruments from short and long holdings in stocks and bonds to
Contracts for Difference (CFDs) and Equity Swaps. Leverage,
concentration, and counterparty risk need to be addressed, together
with OTC derivatives processing and collateral management.
Tracking error - There are many issues to consider with regard to tracking error for
UCITS replications of offshore hedge fund, including whether liquidity
requirements will create performance drag, the level of error
acceptable to investors and the extent to which the selected strategy
will affect performance. Investors may accept greater tracking errors
for high performing funds but equally economic conditions will strongly
"As the popularity of alternative strategies deployed within UCITS
structures continues to grow, it is crucial that every group with an
alternative UCITS product is conscious of the requirements for
liquidity, risk management and reporting and can demonstrate its
ability manage these in a comprehensive manner with the right people
and technology," said Olivier Laurent, Director, Alternative
Investments Product Management, Global Fund Products, RBC Dexia
Investor Services. "The administrator plays an important role and can
work in partnership with funds to ensure this occurs."
About RBC Dexia Investor Services
RBC Dexia Investor Services offers a complete range of investor services
to institutions worldwide. Our unique offshore and onshore solutions,
combined with the expertise of our 5,400 professionals in 15 markets,
help clients grow their business and sustain enhanced performance
through efficiency improvements and robust risk management practices.
Equally owned by RBC and Dexia, the company ranks among the world's top
10 global custodians with USD 2.8 trillion in client assets under
RBC Dexia Investor Services Limited is a holding company that provides
strategic direction and management oversight to its affiliates,
including RBC Dexia Investor Services Bank S.A., a credit institution
licensed in Luxembourg by the Commission de Surveillance du Secteur
Financier and the Ministry of Finance. All are licensed users of the
RBC trademark (a registered trademark of Royal Bank of Canada) and
Dexia trademark (a registered mark of Dexia Crédit Local) and conduct
their global custody and investment administration business under the
RBC Dexia Investor Services brand name.
SOURCE RBC Dexia Investor Services
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