Especially funds which are not designed for cross-border distribution may often be better off under a different regulatory framework than Ucits, the Dutch fund consultant says. His compatriot Rishma Moennasing, a fund analyst at Rabobank, is Ucits-agnostic. “We don’t have a specific preference. For us, not the format but the fund itself is what matters,” she says.
When it comes to funds which pay out dividends, Moennasing even prefers non-Ucits versions. “Because of specific tax legislation in the Netherlands, you can avoid paying dividend tax if the fund is domiciled in the Netherlands as a fiscal investment institution (FBI),” she explains. “This structure saves us up to 30 basis points compared to Ucits versions of the same fund.”
An alternative to Ucits
But the main contestation of Ucits funds comes from the alternative area. “Because of Ucits rules, many strategies cannot be transferred directly into Ucits. In practice this brings a lot of additional risks,” says Vetter.
Alberto Montero manages a fund-of-funds of liquid absolute return strategies at Morabanc, a private bank based in Andorra, but would prefer to invest in “real [off-shore] hedge funds”, as he puts it, if given the choice. “Mifid II forces asset management firms who want to sell their products to retail investors into the Ucits-format,” he says. “I believe this a distortion of the market.”
“It’s more comfortable to manage money in an illiquid mandate,” Montero believes. “The investment universe is also much bigger: the more you can choose from, the better a game you can play.”
Geert Roggeman (pictured left), who runs a small investment boutique specialised in multi-asset investments, also prefers offshore hedge funds. “Our experience with alternatives Ucits funds is that the limitations imposed influence performance, as certain strategies such as CTA’s cannot be used,” he says. “But in practice changes in regulation are driving people towards alternative Ucits funds.”
Best of both worlds
Fred Ingham, lead manager of the Neuberger Berman Absolute Return Multi Strategy Fund, admits the Ucits format has its constraints when it comes to investing in concentration and liquidity rules. “Liquidity and asset class guidelines are an issue for some strategies, like commodities and distressed debt,” he says. Ingham estimates that overall about a third of hedge fund strategies don’t fit in the Ucits-format.
But he has a solution to this problem: running a fund of alternative strategies, like he does. “We currently invest in eleven different strategies within one vehicle, so if one or two of these are illiquid or too concentrated [breaching the 5-10-40 rule] on a standalone basis, that’s not likely to be a problem for us. The fund as a whole would still be Ucits-compatible,” he explains.
He gives an example: “One of the strategies we use trades credit and would not fit Ucits concentration guidelines if run on a standalone basis since it breaches the limits Ucits imposes on maximum bank loan exposure. But because it’s just one of 11 strategies, this is not a problem on the portfolio level. So we are still Ucits-compliant.”