The evolving landscape of UCITS

The evolving landscape of UCITS

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The last decade has witnessed a rise in prominence of UCITS (Undertakings for Collective Investment in Transferable Securities) within the European alternatives industry. With unparalleled regulatory security and global distribution footprint; UCITS is an attractive investment vehicle for hedge funds.

However, this has not always been the case. Originally a mutual fund wrapper which emerged in the 1980’s, UCITS were generally considered vanilla in nature, and their stringent regulatory oversight and investment restrictions didn’t fit well with the more agile investment strategies that hedge funds offered. However, the guidelines evolved over time. Following the expansion of products permitted under UCITS III in 2003, funds were able to use both Exchange Traded and OTC derivatives within their investment processes; which in turn allowed hedge fund managers to use OTC derivatives for shorting securities.

The 2008 financial crisis paved the way for UCITS to emerge as an interesting substitute for offshore hedge fund structures. Aptly labelled “alternative” UCITS, adoption of the structure took off at the start of the last decade and have rapidly become the preferred choice for a large number of hedge fund managers looking to attract investment in continental Europe.

Benefits of the UCITS framework for alternative investment managers and their investors

Since UCITS became the regulated framework of choice post crisis, the key overriding benefits to investors have been threefold; liquidity; regulatory oversight; and lower fees.

Alternative UCITS managers will commonly adopt daily or weekly liquidity for their funds, which offers investors the ability to withdraw their cash more efficiently in comparison to other fund structures. Similarly, the increased regulatory oversight and standardised operating framework provides a fundamental level of transparency, reporting and analytics which allows investors to streamline internal processes.

Alongside these advantages, there is the additional draw of lower fees, especially, when compared to the majority of their offshore peers.

Nonetheless, UCITS have faced various challenges over the last decade. Issues involving tracking error, competing structures emerging as credible alternatives (such as AIFMs), and the closure or selling-on of various UCITS hosting platforms, have clearly disrupted their demand. Despite this, Assets Under Management (AUM) for the alternative UCITS universe currently stand at just below €400bn*, quadrupling since 2008. Whilst we have seen a drop in momentum since Q1 2018, there has been an observable uptick in the later part of 2019. High profile global managers with their headquarters based outside of Europe, particularly in the US, have setup UCITS as a regulated access point to the European investor market.

This adoption continues to bolster and sit alongside European based managers who continue to add UCITS funds to their existing product suites. These additional launches bring the number of funds in Alternative UCITS to over 1,350* as at Oct 2019.

HSBC - The partner of choice for UCITS

Since HSBC launched their Prime business in 2010, using a unique account structure, the business has aligned itself with the UCITS framework and embodied its values of transparency and stability. HSBC can link multiple product offerings with their Prime platform, which, used in tandem, provide numerous benefits and economies of scale – additional products include Trustee and depositary services, global distribution and transfer agency, Fund Admin and Custody. Furthermore, as an organisation, HSBC have extensive experience in the alternative UCITS space and can act as a trusted advisor and consultant.

HSBC’s Prime structure, which uses HSBC Securities Services custody accounts to fully segregate unencumbered client assets, allows them to provide an innovative solution to hedge funds and asset managers looking to enter the alternative UCITS space. Under this differentiated model, HSBC, under the instruction of the client, can use the unencumbered assets as collateral against their other derivative investments (including synthetic shorts), optimising capital deployed and delivering an efficient financing solution. Further to this, daily Custody and Prime Finance client management are brought together, which again, provides operational efficiency and consolidated reporting increasing consistency in the overall UCITS client experience.

If you have any questions around HSBC’s Prime UCITS offering, please reach out to James at HSBC: james.hepworth@hsbc.com

*LuxHedge monthly factsheet Oct 2019

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