Archive for the ‘Introduction’ Category

The UCITS European directive would seem to offer innovation for investors, if only the European Monetary Commission could make the process simpler and cheaper for busy managers and smaller firms with promise.  For now it continues to be  a case of  ’seeking out the expertise of the advisor’ and waiting to see whether that elusive European full cross-border passport will ever emerge.   

Meanwhile financial services providers like Carne group are posed to take up the slack.

By Ingrid Smith 

Wednesday February 27, 2008

Hedge funds have been slow to adopt a UCITS III operational structure compared to more traditional and institutional funds as they baulk at the cost and regulatory requirements, according to Aymeric LeChartier from Carne Global Financial Services Group.

The head of business development at the advisor to European hedge and traditional fund managers told Thomson Investment Management News that the costs involved in implementing the European directive have made it a more difficult step for small boutique houses.

But even the larger hedge funds have chosen to retain their Cayman Island management structure because of the same issues around UCITS III, LeChartier said.

‘The hedge fund world is still a bit reluctant about heavy regulation,’ he added. And, he said: ‘If you’re talking about putting together a UCITS from A-Z for a client it will be almost double the cost of a Cayman fund.’

He argues that, although ‘there’s not a major uptake by hedge funds… (UCITS III) is something that should definitely reshape the industry going forward… the innovative firms have entered that space.’

LeChartier’s comments came as his firm launched a service aimed at ’smoothing the sometimes rocky path’ towards UCITS III authorisation.

The UCITS project aims to allow the marketing of investment funds across the EU, provided the fund and fund managers are registered within an EU member state. The European Commission will publish its draft UCITS directive in the next few weeks amid reported concerns that it may opt not to support the introduction of a full management company passport.

UCITS III also incorporates a so-called product directive which opens up – and regulates – investments in a wider range of financial instruments, including money market, derivatives, index tracking and funds-of-funds.

UCITS funds comprise more than 75 pct of the European fund market, yet according to the EU Commission’s White Paper from the end of 2006, only a relatively small proportion of those are offered cross-border.

Despite the problems highlighted by LeChartier in relation to hedge funds, he argues that the take-up will eventually increase, led by institutions and maturer funds.

LeChartier believes that something approaching a ‘revolution’ is at hand, initiated by the older and larger investment houses with better operational structures in place. They see the heavily regulated directive as a safer ‘alternatives’ bet for ‘the more conservative part of their money.’

He argues these houses will be happier to allocate to alternatives because of reassuring restrictions imposed by UCITS – such as a limited leverage ability and the requirement to have liquid positions.

‘All these restrictions give reinsurance for the fund managers to allocate some of their more conservative portions to a UCITS 130/30… that’s the revolution.’

‘The fact that you can offer an alternative strategy for a more conservative proportion of institutional money will open up the potential market for alternative strategies, and entice houses to put these structures together,’ he argues.

And despite the jittery nature of the market, LeChartier said recent pricing of alternatives shows – through the combined returns of such strategies – that they are faring better than long-only traditional managers.

Carne helps firms structure UCITS vehicles in both Dublin and Luxembourg to meet regulatory requirements under the UCITS III directive.

LeChartier said a significant concern previous expressed by fund managers related to the differing regulatory structures that existed in the two domains.

The Irish regulator had first stated it would allow direct shorting within a UCITS III structure, which was unacceptable to many managers. In contrast, the Luxembourg regulator only allows synthetic shorting through CFDs and other derivatives.

However, the Irish regulator has now backtracked on its direct shorting stance and UCITS III will operate out of that region in line with Luxemborg.

The uncertainty surrounding the regulatory view on direct shorting had ’scared’ some investment houses, he said.

Other areas which firms have found difficult to tackle include the filing of their risk management statements and business plans to the regulator, LeChartier said.

‘That’s where we can add value because of the experience we have, and the relationship we have with the regulators’, he added.

Carne also said it can help firms unfamiliar with UCITS III funds procedures to save time and money.


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