Yesterday I was having lunch with a pension fund buddy and a new abbreviation sprung up: UCITS. He couldn’t tell me what the abbreviation stood for, but this morning I received an article from UCITS Hedge (a hedge fund publication). First I was able to get the spelling right and to get the wikipedia definition: I stands for:Undertakings for Collective Investments in Transferable Securities is hailed as the “new” break through structure for hedge fund participation. It is seen as a superior product to straight “off shore” structures.
First its not new – it has been around since 1988. Wikipedia had an excellent (although short) review of what UCITS are all about – by the way LuxAlpha was an UCITS (more on that later). In plain English UCITS are intra European border free investment vehicles. Over the past year a perception has emerged that UCITS will provide better transparency and better regulation oversight for hedge fund investors. One article mentioned a Scandinavian pension fund saying that asset managers are now less concerned with returns than with eventually getting their money returned!
UCITS vehicle have the economy of scale to do the proper monitoring of a hedge fund’s position (especially mark to market activity) and strategy drift. It sounds like a good idea when you are investing in a hedge fund; there are two main problems with this idea. First, liquidity when you buy and when you sell are two different things – ask anyone playing on the pink sheets, Second if you are assuming supervision, you are assuming that those running the vehicle understand (or care) about the underlying positions taken by the hedge fund manager, third is the ability of the sponsor to add another level of fees. Fourth , most hedge funds have redemption restrictions (e.g. no more than 10% of the fund can be redeemed every year) and many hedge fund have side pocket of highly illiquid investments, which may take years to be liquidated. So the monitoring assumption is a difficult one to prove (or execute for that matter). Finally, earlier I mentioned LuxAlpha which was an UCITS, in fact it was one of Madoffs Europe master feeder vehicle….
Part of this is a rant, in fact an institutional investor cannot delegate its risk management activity to a third party, secondly, the inefficiency in having such interposed third party means that the investors have no direct line of conversation with the hedge fund – that cannot be good for investors. BTW my pension fund buddy had the same view, that this was mostly another gimmick to extract value (by the financial community) for the institutional investor base. The attractiveness of such structure to an institutional investor is that it give the risk manager the ability of off loading his risk supervision role (and obligations). Finally it provide the institutional investors asset allocation team with the “lemming defense”: “this UCITS manages X billions so they most know what they are doing!
There’s an old saying when you don’t know who the sucker is at the table, its probably you!