It is 25 years since the EU first adopted the Undertakings for Collective Investment in Transferable Securities (Ucits) directive. As member states prepare to implement the directive’s fourth iteration, Ireland is confident that it has carved out a niche for itself in establishing Ucits funds.
That confidence is boosted by a recent surge of interest from hedge fund managers who are looking at setting up a Ucits-compliant vehicle. Although a Ucits fund can be domiciled in any EU member state, the bulk of Ucits assets are found in a handful of countries – Luxembourg, France, Ireland and the UK.
While Ireland trails behind Luxembourg and France in terms of total Ucits assets, Irish service providers believe that when it comes to the burgeoning attention from the hedge fund sector they are ahead.
Killian Buckley, head of Kinetic Partners’ Dublin office, says: “The reasons to set up a Ucits hedge fund here are quite compelling. The expertise is here. I think we’ve done well in terms of marrying the two talents.”
“I don’t think it’s a fad,” adds Irish Funds Industry Association chief executive Gary Palmer. “If one looks at the story of Ucits over the last 20 years, it’s a product that’s been evolving in order to meet the requirements of the marketplace. I believe that this is the current chapter in that story.”
Palmer says hedge funds in Ucits wrappers are “Ucits first and foremost” and a widening into more sophisticated strategies is a natural progression of the retail vehicle.
Luxembourg is seen as Ireland’s main competitor for Ucits-compliant hedge funds. However, Ireland’s longer tradition in administering alternative assets and particularly complex hedge fund strategies could be a real bonus.
Although Luxembourg is home to some of the big institutional Ucits platforms, such as Bank of America Merrill Lynch and Deutsche Bank, Ireland also has some of this business.
The Ucits platform for the recently formed joint venture between Crédit Agricole and Société Générale, Amundi, is one good example. Providers say this points to a shift away from the cultural differences that might previously have driven Anglo-Saxon organisations to Ireland and Continental Europeans to Luxembourg as the Francophone Amundi has picked Anglophone Ireland over the more obvious cultural fit of Luxembourg.
Apex Fund Services Ireland managing director John Bohan says Ireland has other advantages over Luxembourg, including a speedier approval process for all funds, including Ucits.
According to Matheson Ormsby Prentice partner Dualta Counihan, Ireland’s regulator employs specialists in sophisticated financial instruments which is another advantage for a hedge fund manager seeking to set up a Ucits fund. These specialists can help advise on the types of derivatives that can be fitted into a Ucits product.
However not everyone is certain that hedge funds in a Ucits wrapper are a good idea. Dermot Butler, chairman of the Custom House Group, says: “I’m convinced a lot of people want them but I’m not sure they’ll be able to use them once they have got them.”
Butler points out the drive to Ucits is because investors feel the vehicle is more open, transparent and liquid.
“If I was a big hedge fund manager and I was approached by a Scandinavian insurance company not allowed to invest in anything but Ucits then I would open up a Ucits fund,” Butler notes.
He is concerned that hedge funds will struggle to attract assets into Ucits vehicles. Butler and other service providers think managers need to have thought carefully about how to distribute their Ucits product in order to succeed.
There is also some concern within the industry about the potential effects of the use of more complex financial products with Ucits and whether the collapse of a Ucits-compliant hedge fund would affect the brand as a whole.
The Irish industry thinks the changes Ucits IV will usher in will be positive for the jurisdiction and the Ucits brand. The ability to set up a master/feeder structure, passport a management company across Europe and give investors clearer information through a key information document are all welcome innovations.
Service providers believe Ireland will be ready for the directive’s implementation in July 2011. The Irish Financial Regulator says it is engaged in discussions with industry participants to ensure that all requirements and procedures are in place in order to facilitate a smooth introduction of Ucits IV.
Looking further into the future, the industry is confident Ucits V will closely follow Ucits IV. That could address some of the concerns raised about the way hedge fund managers are currently fitting their strategies into the Ucits wrapper and acknowledge the fact that the vehicle has come a long way since it was first devised a quarter of a century ago.
The week in Risk.net, February 10-16 2017Receive this by email