Insights into the structuring of UCITS III hedge funds - invest'13
Insights into the structuring of UCITS III hedge funds - invest'13
Insights into the structuring of UCITS III hedge funds - invest'13
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<strong>Insights</strong> <strong>into</strong> <strong>the</strong> <strong>structuring</strong> <strong>of</strong><br />
<strong>UCITS</strong> <strong>III</strong> <strong>hedge</strong> <strong>funds</strong><br />
Vincenzo Bochicchio, Head <strong>of</strong> Product Structuring for Europe<br />
and South America, Man Investments<br />
FOR INVESTMENT PROFESSIONALS ONLY
What is <strong>UCITS</strong>?<br />
A European fund platform<br />
European Collective Investment Scheme<br />
<strong>UCITS</strong> = Undertakings for Collective Investments in Transferable Securities<br />
European regulation<br />
EU directives regarding open-ended investment<br />
<strong>funds</strong><br />
European passport<br />
Simplified registration for public distribution in EU<br />
Member States<br />
<strong>UCITS</strong> <strong>III</strong><br />
Harmonisation<br />
Sets uniform standards for investment <strong>funds</strong><br />
2
The development <strong>of</strong> <strong>the</strong> <strong>UCITS</strong> directive<br />
• <strong>UCITS</strong> I<br />
• Publication <strong>of</strong> <strong>the</strong> <strong>UCITS</strong><br />
directive - 85/611/EEC<br />
• <strong>UCITS</strong> <strong>III</strong><br />
• Publication <strong>of</strong> <strong>the</strong> <strong>UCITS</strong><br />
directive - 2001/107/EC<br />
• <strong>UCITS</strong> IV<br />
• Publication <strong>of</strong> <strong>the</strong> <strong>UCITS</strong><br />
directive - 2009/65/EC<br />
Dec 1985<br />
Oct 1989 Dec 2001 Feb 2004<br />
Nov 2009<br />
Jul 2011<br />
• Implementation <strong>of</strong> <strong>UCITS</strong> I<br />
by each Member State<br />
• Implementation <strong>of</strong> <strong>UCITS</strong> <strong>III</strong><br />
by each Member State<br />
• Implementation <strong>of</strong> <strong>UCITS</strong> IV<br />
by each Member State<br />
3
Rationales behind <strong>UCITS</strong> <strong>III</strong> <strong>hedge</strong> <strong>funds</strong><br />
Investors’ perspective<br />
Investors’ demand<br />
“Response” within <strong>UCITS</strong><br />
• Liquidity<br />
<strong>UCITS</strong> <strong>III</strong><br />
• At least bi-monthly liquidity<br />
• Regulatory oversight<br />
<strong>UCITS</strong> <strong>III</strong><br />
• Well recognised and widely accepted regulatory framework<br />
• Risk oversight<br />
<strong>UCITS</strong> <strong>III</strong><br />
• Counterparty risk mitigation and extensive risk control process<br />
• Transparency, reporting<br />
<strong>UCITS</strong> <strong>III</strong><br />
• More transparency on assets, guidelines, risk reporting available<br />
• Settlement<br />
<strong>UCITS</strong> <strong>III</strong><br />
• Mutual fund settlement process (mostly DVP)<br />
• Tax treatment<br />
<strong>UCITS</strong> <strong>III</strong><br />
• Better tax treatment in most EU countries (especially Italy)<br />
4
Distribution advantages<br />
A single product for <strong>the</strong> whole <strong>of</strong> Europe<br />
• Opportunity to distribute a public product across <strong>the</strong> whole <strong>of</strong> Europe<br />
• Only product form which is tax-efficient across all European key markets<br />
• Fur<strong>the</strong>r distribution potential outside Europe, particularly in Asia<br />
5
How do <strong>hedge</strong> <strong>funds</strong> fit with <strong>UCITS</strong> <strong>III</strong> ?<br />
Eligible asset test and investment restrictions for <strong>UCITS</strong> <strong>III</strong><br />
Eligible assets<br />
• Transferable securities<br />
• MM instruments<br />
• FX rates & currencies<br />
• Interest rates<br />
• <strong>UCITS</strong> <strong>funds</strong><br />
• Bank deposits<br />
• Eligible derivatives<br />
Investment restrictions<br />
Counterparty subject to<br />
• Restrictions on concentration<br />
and diversification (5/10/40)<br />
• Restrictions on borrowing<br />
(10% only for bridging)<br />
• Restrictive access to asset<br />
classes, e.g. commodities<br />
• Strict and demanding liquidity<br />
(bi-monthly)<br />
• No direct short<br />
<strong>UCITS</strong> <strong>III</strong><br />
6
How to implement <strong>UCITS</strong> <strong>III</strong> <strong>hedge</strong> <strong>funds</strong>?<br />
Direct trading approach<br />
• <strong>UCITS</strong> fund trades strategy directly on its balance sheet within <strong>the</strong> <strong>UCITS</strong> <strong>III</strong><br />
guidelines<br />
– Plain vanilla and most popular approach for <strong>UCITS</strong> <strong>III</strong> single <strong>funds</strong><br />
– Prime broker relationship with <strong>UCITS</strong><br />
– Direct trading <strong>of</strong> eligible instruments only (no physical commodities, no instruments<br />
which are not considered securities, e.g. loans)<br />
– Direct trading subject to <strong>UCITS</strong> investment restrictions<br />
• Application for <strong>UCITS</strong> FoHF:<br />
– Fund <strong>of</strong> single <strong>UCITS</strong><br />
– “Fund <strong>of</strong> fund linked certificates”<br />
7
How to implement <strong>UCITS</strong> <strong>III</strong> <strong>hedge</strong> <strong>funds</strong>?<br />
Direct trading approach – direct trading <strong>of</strong> fund linked certificates<br />
Certificate 1 Certificate 2<br />
Certificate 3<br />
Certificate N<br />
Fund <strong>of</strong> fund linked certificates<br />
• No look-through applies to <strong>the</strong> certificates; all target <strong>funds</strong> can be <strong>of</strong>fshore<br />
• At least 16 certificates (4x10%; 12x5%) required from <strong>the</strong> diversification rule (5/10/40)<br />
• Sufficient liquidity requirement, i.e. issuer/banks are required to <strong>of</strong>fer secondary market<br />
facility to maintain liquidity for certificates<br />
• Complex from operational perspective<br />
8
How to implement <strong>UCITS</strong> <strong>III</strong> <strong>hedge</strong> <strong>funds</strong>?<br />
Derivative fund approach<br />
• <strong>UCITS</strong> fund gets HF exposure through an index representing <strong>the</strong> <strong>hedge</strong> fund strategy<br />
Eligible assets<br />
Eligible derivatives Eligible indices<br />
• Transferable securities<br />
• MM instruments<br />
• FX rates & currencies<br />
• Interest rates<br />
• <strong>UCITS</strong> <strong>funds</strong><br />
• Bank deposits<br />
• Eligible derivatives<br />
<strong>UCITS</strong> <strong>III</strong><br />
• Counterparty subject to<br />
prudential supervision<br />
• Reliable valuation on<br />
daily basis<br />
• Permissible underlying:<br />
- All <strong>of</strong> <strong>the</strong> eligible<br />
assets <br />
- Commodities <br />
- Financial indices ?<br />
• Sufficient diversification<br />
• Representative benchmark<br />
• Appropriate publication<br />
• CESR Guidelines<br />
• Rules based<br />
• No retrospective<br />
calculations allowed<br />
• No kick backs<br />
<strong>UCITS</strong> + CESR<br />
9
How to implement <strong>UCITS</strong> <strong>III</strong> <strong>hedge</strong> <strong>funds</strong>?<br />
Derivative fund approach – concrete example with Man AHL Trend<br />
Man Umbrella SICAV<br />
Subfund: Man AHL Trend<br />
Asset<br />
Swap<br />
In-/decrease <strong>of</strong> Notional<br />
Funded TRS linked to<br />
Financial Index<br />
Swap value (MTM) =<br />
Notional x Index Performance<br />
Bank<br />
Financial Financial Index<br />
40<br />
Cash<br />
Swap (TRS)<br />
Futures &<br />
Forwards<br />
FDI<br />
(Target IE 100)<br />
Hedging<br />
<strong>UCITS</strong> <strong>III</strong> eligible collateral<br />
Replication<br />
portfolio<br />
Fund Swap Index<br />
Investment exposure<br />
Performance<br />
10
Structuring approaches for <strong>UCITS</strong> <strong>III</strong> single <strong>funds</strong><br />
Summary <strong>of</strong> benefits and considerations<br />
Benefits<br />
Considerations<br />
Direct approach<br />
• Straight and transparent implementation<br />
• Easy to explain from marketing<br />
perspective<br />
• No structural credit risk<br />
• Low slippage for equity related strategies<br />
• Large asset flows in <strong>the</strong> market<br />
• Investment strategy and type <strong>of</strong><br />
instruments restricted (“Hedge fund lite”)<br />
• Accept diversion from target <strong>of</strong>fshore fund<br />
• High slippage for illiquid strategies, e.g.<br />
Event Driven<br />
Derivatives approach<br />
• Use <strong>of</strong> any financial instrument<br />
• Fit well with systematic strategies (e.g.<br />
CTA world), not suited for discretionary<br />
strategies<br />
• Structural credit risk is minimised<br />
through collateralisation<br />
• Similar to ETF technology<br />
• Index rules and construction<br />
• Costs for fully funded strategies<br />
• Layering<br />
• Structure has to be explained<br />
• Credit risk but collateralised<br />
11
Structuring approaches for <strong>UCITS</strong> <strong>III</strong> fund <strong>of</strong> <strong>hedge</strong> <strong>funds</strong><br />
Summary <strong>of</strong> benefits and considerations<br />
Benefits<br />
Direct approach<br />
• Straight and transparent implementation<br />
• Easy to explain from marketing<br />
perspective<br />
• Popularity: 80% <strong>of</strong> FoHF managers plan to<br />
launch such structure in 2010<br />
Derivatives approach<br />
• Broader investment universe<br />
• Less strategy bias<br />
• Suitable for “adequate” diversified, style<br />
or niche fund <strong>of</strong> <strong>funds</strong> exposure<br />
Considerations<br />
• Depth <strong>of</strong> investment universe – only about<br />
100 <strong>UCITS</strong> <strong>hedge</strong> <strong>funds</strong><br />
• Strategy bias – mainly L/S and GM<br />
• Certificate approach could broaden<br />
investment universe but beware credit risk,<br />
liquidity risk and operational complexity<br />
• Higher cost potential – Fund <strong>of</strong> <strong>UCITS</strong><br />
running costs higher than <strong>of</strong>fshore<br />
equivalent<br />
• Index rules and construction<br />
• Costs for fully funded strategies<br />
• Layering<br />
• Structure has to be explained<br />
• Credit risk but collateralised<br />
12
Man <strong>UCITS</strong> <strong>of</strong>fer<br />
Product overview<br />
Name<br />
Man AHL Trend<br />
Man AHL<br />
Diversity<br />
Man Multi<br />
Manager<br />
Man Long/Short<br />
Europe<br />
Style<br />
Managed futures<br />
Managed futures<br />
Diversified<br />
Long/short equity<br />
Single / multi manager<br />
Single manager<br />
Single manager<br />
Multi manager<br />
Multi manager<br />
Number <strong>of</strong> managers<br />
1<br />
1<br />
64*<br />
8*<br />
Liquidity<br />
Weekly<br />
Weekly<br />
Daily<br />
Weekly<br />
Currency<br />
EUR / USD<br />
GBP<br />
EUR<br />
EUR<br />
Source: Man database. *As at 30 June 2010<br />
13
Man <strong>UCITS</strong> <strong>of</strong>fer<br />
Passporting<br />
CH<br />
AT<br />
CYP<br />
DEN<br />
FIN<br />
FRA<br />
GER<br />
ITA<br />
NL<br />
NOR<br />
SPA<br />
SWE<br />
UK<br />
SGP<br />
Man AHL Trend<br />
Man AHL Diversity<br />
Man Multi Manager<br />
Man Long/Short Europe<br />
Sub-fund / Share class registered<br />
Sub-fund / Share class not registered<br />
Sub-fund / Share class pending approval<br />
14
Conclusion<br />
Advantages and considerations <strong>of</strong> <strong>UCITS</strong><br />
+ More security and more regulation for <strong>the</strong> investor's benefit<br />
+ Transparency<br />
+ Tax efficiency<br />
+ Scalability – distribution scope<br />
- Likely return deviation from reference fund<br />
15
Q & A
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