UCITS Hedge Platform Survey 2012: Building routes to a new investment market place pdf

The alternative UCITS market has been shaping up for this test since Merrill Lynch began to sign up hedge funds to its Investment Solutions platform over five years ago.. “Whether a clie

or alternative funds that conform to the

Undertakings for Collective Investments in

Transferable Securities or UCITS format 2012

may prove a turning point It could be the year that

alternative UCITS funds ramp up assets drawn from

retail investor networks, cracking open a lucrative

new avenue for growth outside of the institutional

investor sector No one expects retail flows to

surpass institutional flows to alternative UCITS quite

yet But the question of whether alternative UCITS,

sometimes dubbed Newcits, can thrive in the retail

market and in the distribution networks that serve

such investors is likely to be answered one way or

the other over the next year or two

The alternative UCITS market has been shaping up

for this test since Merrill Lynch began to sign up

hedge funds to its Investment Solutions platform

over five years ago Since 2005, assets under

management have doubled to around €75 billion

(See Fig.1) after early rapid growth in alternative

UCITS This followed the introduction of the updated

UCITS III provisions in 2001 which permitted the use

of some basic hedge fund investment techniques,

including moderate leverage, short selling and

derivatives exposure Following the wide spread

gating that took place in the post-2008 credit crunch,

the UCITS provisions giving minimum 15 day liquidity

suddenly looked appealing and had the virtue of

addressing a key investor concern

Alternative UCITS evolving

Even so, this is a sector still in a relatively early

phase of evolution Our own UCITS Hedge database

tracks over 500 funds compared with over 10,000

in the offshore sector Moreover, regulation of this

new market is developing as the European Securities

and Markets Authority is holding a consultation on

UCITS Though this is cloaked as an examination of

exchange traded funds and structured UCITS, it is

clear that several aspects of the Newcits phenomena

are being scrutinized closely This is also the case

with continuing deliberations on the part of the

French regulator, the AMF Some changes in how

UCITS operate are probably inevitable even if the

broad approach that has developed is maintained

“The regulatory authorities are focusing on the

migration to UCITS IV,” says Florent Josset, head of

Nomura Alternative Investments Group “I don’t see

that directly affecting alternative UCITS Some of

the debate around index structures and synthetics,

especially regarding synthetic and physical ETFs, will

continue but shouldn’t lead to fundamental issues for

UCITS.”

What seems clear is that there will be no turning

back from an increasingly pan-European, onshore

asset management sector using reasonably

sophisticated portfolio management tools The

commercial advantages UCITS offer, chiefly transparency and liquidity, are appealing to new market segments both in terms of geography and client type Not only have alternative UCITS fund structures thrived in Europe, their seal of approval now extends to investors in the Middle East, Asia and Latin America This is attracting the attention of alternative fund managers, notably in America and some emerging markets

“In my view, UCITS is increasingly becoming an attractive investment vehicle for many investors, who appreciate the enhanced liquidity, transparency and regulatory oversight that the structure has

to offer,” says Roman Rosslenbroich, CEO, Aquila Capital “At Aquila Capital, we recognized the advantages that UCITS offers both managers and investors very early on We converted our AC Risk Parity Fund to a UCITS structure in 2008, making it one of the first absolute return UCITS funds available

in the market Since then, we have seen significant inflows into our UCITS fund range, with our AC Risk Parity strategy recently reaching assets under management of over €1.3 billion.”

New platform providers

The UCITS sector’s quickly growing horizons attracted some big new entrants to the market in 2011

Goldman Sachs International launched a platform for external managers in the third quarter which now has three funds With the entrance of the leading hedge fund prime broker to offshore funds, it would appear that the UCITS market is primed for further expansion

Indeed, several funds have been conspicuous by their success with each getting to $1 billion in AUM and beyond: Winton Capital (DB Platinum platform), Aquila Capital (Alceda platform) and York Capital (Merrill Lynch Investment Solutions)

Other investment banks have entered the fray, notably, UBS which acquired the Luxembourg Financial Group platform in mid-2011 Post-integration

of LFG, UBS is gearing up for a renewed push into UCITS later in 2012, says Mike Fullalove, the bank’s global head of alternative fund distribution He adds that the refocusing of the UCITS strategy at UBS will result in additional managers and strategies being launched on the platform later this year

Helping managers adapt

Managers of hedge fund investment strategies are accustomed to advising lightly regulated offshore funds In comparison, the legal and custodial structures for the onshore hedge fund strategies via UCITS are more circumscribed Consequently, there

is much learning and adaptation required to tap the emerging investor appetite for UCITS compliant investing The ready solution for managers and investors is the UCITS hedge fund platform, of which around 20 are on offer

“For investors one attraction of investing via a platform is the additional risk oversight,” says Alex McKenna, head of fund structuring, at Deutsche Bank, which runs the db Platinum UCITS platform

“Deutsche Bank is a trusted institution and has a great deal of experience with hedge funds and alternative investments Investors see the platform environment

as a well controlled environment Deutsche Bank has the platform to meet the highest standards within that regulatory framework.”

For investors, the UCITS format for hedge funds strategies offers particular benefits These include: regulated standards of operation and oversight; formal controls on counterparty risk; an open-end fund structure with frequent dealing and

UCITS Hedge Platform Survey

Building routes to a new investment market place

BILL McINTOSH

F Fig.1 Estimated assets under management in UCITS-compliant hedge funds (EUR) Source: UCITS Hedge

90 80 70 60 50 40 30 20 10 0

01-Apr-05 01-Aug-05 01-Dec-05 01-Apr-06 01-Aug-06 01-Dec-06 01-Apr-07 01-Aug-07 01-Dec-07 01-Apr-08 01-Aug-08 01-Dec-08 01-Apr-09 01-Aug-09 01-Dec-09 01-Apr-10 01-Aug-10 01-Dec-10 01-Apr-11 01-Aug-11 01-Dec-11

cost-effective, even when highly complex issues are involved,” says Hamid Parsa, Director of Business Development at Alceda “Whether a client is looking

to launch an alternative investment absolute-return or long-only fund, Alceda is able to complete the process

of setting up a UCITS fund within a period of six to eight weeks.”

Reaching investors

Getting a fund onto a platform and approved by regulators is, of course, just one factor that managers face in selecting a platform Cost efficiency and speed

to market are particularly important in the early stages of a fund’s life This is notably true of the UCITS sector where managers are keen to get products before investors at a time when growth is high and first mover advantage is tangible However, once a fund is up and running distribution takes on primary importance With the growing adoption of UCITS in places as far flung as Chile and South Korea, the value

of having global distribution networks to institutions

commensurate high fund liquidity; and increased

transparency through mandated reporting and risk

measurement processes

UCITS adds complexity

For hedge fund managers, these very attributes of

a UCITS product introduce challenges There is the

need to register with another regulator, most often

in Luxembourg or Ireland In addition, more parties

are needed to run an onshore fund (notably the

custodian as well as the administrator), while there

are also increased burdens on operations, compliance,

marketing and to some extent the investment staff of

the investment advisor

Having a turnkey solution to handle these matters

is the key attribute of any platform At Swedish

investment bank SEB, EFA acts as the administrator,

while the bank itself is global custodian With

pre-approved service providers, a fund can be up and

running on the SEB Prime Solutions UCITS platform in

three to four months compared to the year a manager

might need to launch independently, says Peter

Herrlin, client executive for European hedge funds

with SEB’s prime brokerage unit “For us it is very

much a part of our prime brokerage offering.”

Freedom of Choice

Among the platforms, there is substantial variation

Some platform sponsors, like SEB, Merchant and

Matrix, are agnostic about what choices investment

managers make by service function The choice of

prime banker (that is the onshore equivalent of prime

broker) is typically unrestricted As a rule, the fund

manager can extend the existing prime brokerage

relationship for the offshore fund to the onshore

product In some cases, investment banks have set up

a UCITS platform to satisfy prime services clients with

offshore hedge funds

Sometimes the fund manager has a strong banking

relationship that can influence the choice of

custodian However, it is often the case that the

choice of administrator and custodian is more

circumscribed than the choice of prime broker/banker

In some cases, the selection of an administrator

or custodian may be proscribed by the particular

domicile where a fund platform has been set up

So a platform sponsor with a history of activity in

Ireland, like Lyxor, for example, will find it natural to

select a Dublin based administrator and custodian

with a strong presence there Similarly Alceda, which

has a business background in Luxembourg, finds it

natural to line up administrators and custodian banks

with a presence and understanding of working in

Luxembourg

“Our long-standing experience in structuring both

alternative and traditional investments ensures

that our fund set-up process is timely, efficient and

is substantial And as a number of respondents to this survey indicated, moves to develop distribution to retail investors are being ramped up

“Using a UCITS platform’s marketing networks is key since it is better to market under a well known platform as it gives extra credibility,” says Apostolos Avlonitis, portfolio manager of RP Capital Group which recently launched the RP Systematic Emerging Markets UCITS Fund on ML Capital’s Montlake platform He also cites the advantages of a cheaper initial set up and more efficient regulatory application process since platforms have professionally trained UCITS staff with knowledge of compliance and risk management procedures

Growing quickly

One of the faster growing platforms in 2011 is the FundLogic offering run by Morgan Stanley Several fund managers have embraced its strong European distribution capabilities

At the same time, the platform has appealed to investors’ appetite for diversification by enlisting

a growing range of managers, many of whom are outside of Europe

“For hedge fund managers, FundLogic offers

a completely outsourced and turnkey solution enabling them to tap into the UCITS market while benefiting from Morgan Stanley’s unique distribution capabilities, including institutional investors and intermediaries,” says David Armstrong, the investment bank’s Global Head of Fund Linked Products “To investors, we provide a comprehensive range of highly skilled investment managers We believe our edge lies in our ability to offer a large

“The regulatory authorities are focusing

on the migration to UCITS IV,” says Florent Josset, head of Nomura Alternative Investments Group “I don’t see

that directly affecting alternative UCITS Some

of the debate around index structures and synthetics, especially regarding synthetic and physical ETFs, will continue but shouldn’t lead to fundamental issues for UCITS.”

UCITS Platform Operators

• Alceda Fund Management

• Lyxor Asset Management

• Deutsche Bank Platinum

• Merrill Lynch Investment Solutions

• Universal – Investment

• Schroder GAIA

• Morgan Stanley FundLogic Alternatives

• UBS Liquid Alpha

• Matrix

• SEB Prime Solutions UCITS

• Merchant Capital

• Montlake UCITS

• Goldman Sachs International

• Nomura

• Prodigy Capital Partners

lifeline even though some strategies weren’t suited

to it That accounted for the big flurry of launches

But we are strong believers in the continuity of growth in the UCITS market I can’t see a scenario where the UCITS market will become diminished.”

Managers more discerning

It is probably no bad thing that fund managers have become more discerning about the suitability of a strategy to the UCITS framework Bubbles beget busts With memories of 2008 still fresh a more considered approach to the sector’s development

is in the interests of managers, platform providers and, of course, investors

Merrill Lynch, now Bank of America Merrill Lynch, was the first investment bank to launch a UCITS platform BAML is continuing to build its fund offering even though it has come through the initial growth phase that newer platform providers are still experiencing

“We are continuing to broaden our offering to diversify our product range,” says Miriam Muller, head of BAML’s fund platform group “The mandates

in the pipeline will take us beyond 20 funds and

we have said the optimal number is 25 to 30 funds

We have reached critical mass and have a broad selection of strategies available to investors.”

Regulation evolving

Several regulatory changes will impact the evolving UCITS landscape in 2012 Platform operators have until mid-year to finalise Key Investment Information Documents or KIIDs Operators will also

be studying the advent of UCITS V and whether they will incur higher costs from assuming custodian responsibilities and related liabilities

Perhaps the biggest change, however, is the retail distribution review or RDR that comes into effect

in the UK at the year-end Under RDR, third party marketers, notably IFAs, will charge a direct advisory fee from investors instead of taking an upfront fee

“It will become clear what investors are paying to whom and how much,” says BAML’s Muller “We think that will level the playing field to the extent that there will be greater transparency on fees and more emphasis placed on fund quality for the end investor in terms of the various competing products.”

The timing of RDR may dovetail with the evolution of alternative UCITS to seek retail channels to market

Certainly, the growth in alternative UCITS platforms has resulted in a number of operators coming into the market to focus exclusively on tapping the retail investor opportunity Here the approach of Merchant Capital, which has acquired a network

of 120 IFAs, is instructive “We see the opportunity

number of US based investment managers under

our unique platform, allowing investors to obtain

a diverse range of investment exposures by

accessing a wide range of managers under one fund

umbrella.”

Land grab slows

With 2011 just completed two data points in the

UCITS sector stood out First, not only hedge funds

but also UCITS funds lost money But the performance

of the onshore sector was far less volatile The

UCITS Hedge Index ended 2011 with a drawdown of

4.55% compared with an 8.87% fall for the offshore

bellwether HFRX Global Hedge Fund Index

The second data point is that new launches for

alternative UCITS funds in 2011 fell below the levels

recorded in both 2009 and 2010 Indeed, launch

volumes in 2010 were approximately double the

levels recorded during the past year Several reasons

may help explain this First, there is some evidence

that the three main UCITS strategies – long/short

equity, managed futures and macro – had already

seen fund origination outpace capital allocation

So a slowdown in line with a falling off in investor

commitments was understandable There is also

anecdotal evidence that some managers delayed

setting up new UCITS funds to concentrate

exclusively on steering existing funds through a

highly difficult market environment

“There were a lot of funds that weren’t as successful

as they would want to be,” says George Cadbury,

head of Merchant Capital’s UCITS umbrella for

alternative funds “Some managers saw UCITS as a

for UCITS being the retail market,” says Cadbury

“It is very much an educational drive Many IFAs are unaware of the opportunity in UCITS,” he says, noting that market volatility underlines the attractions of hedge funds as risk managers “We are hoping to change this sentiment a little bit and offer a better alternative.” One noteworthy success

in the retail UCITS market is BlackRock UK Absolute Alpha, which has taken in over $4 billion

Another is Schroders GAIA Egerton European Equity, which has attracted over $600 million from investors who like its success in achieving better than equity-type returns with less risk

“Schroders is a very reputable asset management firm with a high quality product offering

and distribution,” says Jeff Blumberg, CEO of Egerton Capital, which manages the fund “Our collaboration with Schroders thus far has been seamless and, most importantly, a success for our mutual clients.”

Given these successes and the fact that around

$8 trillion is invested in the UCITS market, overwhelmingly in long only funds, it’s clear the opportunity for Newcits is palpable Perhaps nowhere is this more the case than in Germany Not only is it Europe’s biggest market, it is one where alternative fund investing has been hampered

by both the business culture and tax provisions But German platform operators like Alceda and Universal-Investment have made great strides in

“We are strong believers

in the continuity of

growth in the UCITS

market I can’t see a

scenario where the

UCITS market will

become diminished”

says George Cadbury,

head of Merchant

Capital’s UCITS umbrella.

“One thing we offer managers is the whole hearted backing of our distribution network,” says Gavin Ralston, global head of product with Schroders ”We sell these funds as if they were Schroder funds We have strong distribution

of UCITS.”

For some specialist UCITS platform operators, securing distribution lines is a function of setting up ties with specialist teams targeting specific investor niches ML Capital, the operator of the Irish-domiciled Montlake UCITS platform, has cemented a significant distribution agreement with Acolin Fund Services of Zurich It will provide managers on the platform with access to several hundred banking groups across the German and Swiss marketplaces

Establishing distribution

“The market is clearly recognising the vital importance of distribution which a well placed UCITS platform can deliver,” said John Lowry, chairman of ML Capital

“The deal with Acolin will further enhance our competitive position as these distribution deals can often take a year or more to structure We are currently also in discussions with a number of distribution partners and private banking groups

in Latin America and Asia, which are experiencing significant demand for alternative UCITS products.” He

bringing alternative fund products onshore to the

country’s huge investor community

“We will see a lot of new asset managers from

overseas offering well established successful

strategies for German investors,” says Stefan Klein,

an executive in investment product management

with Universal-Investment He cites the US and

Scandinavia, among others, as among the main

centres for Newcits managers now marketing to

German investors

Klein confirms that the Alternative Investment

Fund Manager Directive, even though it doesn’t

take effect presumably until mid-2013, is having an

impact on the Newcits market “AIFMD is mainly

having a positive effect because we see many

offshore managers coming onshore now,” he says

“Sometimes it is hard to handle all the issues, but

net, net it has had a positive effect.” Luxembourg

and Ireland have attracted most of these funds,

but Germany, the UK and new centres in Malta and

Gibraltar are also gaining funds

The main emphasis on some UCITS platforms falls

squarely on distribution With Matrix Group, for

example, there is more flexibility for managers to

come on board with their own service providers and

the partnership with funds is a genuine two way

process

“The main thing is the breadth of the distribution

channel,” says Luke Reeves, a director with Matrix

and head of retail and institutional business

development “We can work with existing teams

as appropriate Quite a lot of the groups we work

with have their own sales teams But we can be

complimentary and work with them to develop

different sales channels.”

A network effect

Some of the UCITS platforms are being run by big

institutional fund management groups combining

internal and external funds External managers on

such platforms get highly visible brand recognition

and global scale At Schroders, the three funds on

the platform advised by external managers come

from very prominent hedge fund firms: CQS, Egerton

Capital and Sloane Robinson Indeed, Schroder

GAIA Egerton European Equity has raised over $600

million since inception in November 2009

“One thing we offer managers is the

whole-hearted backing of our distribution network,”

says Gavin Ralston, global head of product with

the fund manager ”We sell these funds as if they

were Schroder funds We have strong distribution

of UCITS not just in Europe but in Asia and Latin

America We can position UCITS funds to be sold

globally.”

sees demand for alternative UCITS growing in some

of the classic hedge fund strategies, notably global macro and managed futures along with a renewed interest in global emerging markets strategies The growing interest in the UCITS sector among investors is seeing some start up managers consider launches early in a fund’s life cycle Many of the funds on the more established platforms proved themselves initially offshore before evolving a UCITS offering in the last few years It means they have

a substantial investor base and commensurate financial resources But with start-up and emerging managers resources are likely to be more limited For them, a UCITS wrapping with a pared down cost base may prove to be very attractive

A soon-to-launch UCITS platform from Prodigy Capital Partners is aiming to address this market Prodigy is awaiting regulatory approval for an umbrella structured Luxembourg SICAV, which will host its merged UK UCITS and Cayman emerging market fund When the platform is established in the coming months, a fund will be able to launch in UCITS format for a one-off flat fee of circa €25,000 (as well as avoiding the typical repeating share of the management fee that other platforms charge) That will cover start-up costs, local fees, directors and audit Citi is tasked with being the depositary and custodian, with Andbanc the administrator

“There are quite a number of small start-up fund managers wanting to get a UCITS,” says David Robinson, managing principal and portfolio manager with Prodigy “They want to focus on raising money rather than spend time going through the UCITS setting-up process on their own We have gone through this process and now we can offer the same to a manager with minimal pain or interruption We think there may be people who want to join our syndicate and share the costs, which are extremely competitive and attractive to small and mid-sized funds.”

The cost savings come from combining small managers to create economies of scale The managers maintain complete operational freedom—unlike large bank platforms, a fund won’t

be tied to any particular provider for, say, swaps or other business needs Instead, the aim is to ensure that individual fund managers aren’t subsumed in

a vastly bigger entity, enabling them to build their own brand equity and evolve their businesses as required

“The beauty of this concept is low cost, tremendous speed and flexibility combined with own branding and ownership,” says Robinson “Once set up, a new manager can focus on building their business and selling their fund.”THFJ

“There are quite a number of small

start-up fund managers wanting to get a UCITS,”

says David Robinson, of Prodigy “They want to focus on raising money rather than spend time going through the UCITS setting-up process on their own We have gone through this process

and now we can offer the same to a manager with minimal pain or interruption.”

ntrepreneurs invariably are motivated to build

a company when they are unable to find an

existing offering in the market that satisfies

their needs From making this discovery to taking

the initiative to fill this market gap is often just a

small step

Originally, Alceda Fund Management S.A set

up private label funds (for clients such as family

offices) who wanted to put their own brand on

fund products From these small beginnings the

business has evolved substantially as filling one

market gap opened up views of others Established in

Luxembourg in 2007, Alceda has grown to become a

leading independent structuring specialist providing

institutional investors, asset/fund managers, banks

and family offices with tailored investment solutions

It has assets under administration of $7 billion

The Alceda UCITS Platform (AUP) supports $4.5

billion in a broad range of UCITS funds The single

best resource is the 65-strong team based in

Luxembourg, the depth and breadth of which serves

the firm well in the setting up and operational

phases As a specialist in structuring there is a

significant legal/set-up team, a risk team and an

operations team to handle pre-trade and post-trade

controls The team’s scale will be a big plus when

the next wave of regulatory change hits Smaller

competitors may struggle with limited personnel

to adapt to the increased demands of UCITS IV and

UCITS V, for example

As a member of the Aquila Capital Group, Alceda has

grown out of an asset management company The

UCITS offering is as flexible as those on any platform,

giving life to the firm’s tag line: ‘Tailor-Made

Structuring Solutions made in Luxembourg’ Whilst

many platform providers profess agnosticism to

which service providers managers chose, the phrase

‘open architecture’ is well applied when it comes

to Alceda Managers coming on to the platform

have genuinely free choices for the role of fund

administrator, custodian bank, prime brokers (swap

providers) and auditors

According to Hamid Parsa, Director of Business

Development at Alceda, this flexibility is necessary to

fulfil the corporate philosophy that the form should

follow the function “We shape the product for what

is best for the investment strategy, not the other

way round.” He says this is only possible because of

the team experience in structuring and in the design

of different investment vehicles – a real asset for

managers coming onto the platform now He adds:

“What sets us apart is our ability to bring managers’

investment ideas to the market as they originally

intended them For example, if certain strategies

do not fit the UCITS format, Alceda has also the

capability to offer other structuring solutions, such

as SIF vehicles In working with Alceda managers do not have to curtail their investment objectives or compromise the strategy’s risk-return profile.”

Alceda has a three step process to bring funds onto the platform (see Fig.1) From initial consultation

to fund launch can be as short as six to eight weeks If time-to-market is an important factor for

an investment manager using an experienced and expert guide is imperative Clients are supported

by a client advisory team during the entire lifetime

of the products, and a dedicated project manager works with the clients through each stage

Setting up a UCITS fund independently can be costly and time consuming for a manager unfamiliar with the ways of the CSSF For small to medium-sized managers, who often do not have the same operational set-ups and resources that the big players have, it makes sense to join a platform like AUP, which offers them a ready-made advantage

The platform handles all aspects involved in the product launch, thereby enabling the fund manager

to focus on their core competency of return generation Once a manager is on AUP launching

a second fund is very easy Alceda employs a standalone structure, which gives each new fund its own individual fund umbrella As a consequence, the funds on AUP are completely independent An additional fund can be in place in a few weeks

A one stop shop

“We aim to provide a full range of services under one roof – a one-stop shop for bringing funds to market,

if you like,” says Parsa Alceda has developed a lot of the technology itself instead of outsourcing as much

as possible, the route which most platform providers take “This should provide efficiencies to the client

in setting up We provide a seamless vehicle for fund managers to run their own UCITS funds, and for small-to-mid-size firms we can be very competitive.” Alceda is looking to grow the distribution capabilities

it can deploy on behalf of funds coming onto the platform It uses a hybrid approach, having a dedicated third party distribution team for sales in

Alceda Fund Management

Independent platform advances open architecture

SIMON KERR

E Fig.1 Alceda Fund Management’s 3 step process to fund launch

Initial consultation/

meeting Check feasibility of strategy Due diligence Prepare a quotation

Drafting fund documents Conception of marketing

& distribution strategy

•

•

•

Face-to-face meeting

in Luxembourg or at your office Defining your requirements Clarifications of trade details

•

•

•

•

•

•

Source: Alceda

Fig.2 Investment Strategy

Macro Discretionary 16.7%

Macro Systematic 16.7%

Fund of Funds 33.3%

Relative Value 33.3%

Source: UCITS Hedge

AUP span a broad range of strategies, including long short equity, global macro, CTA, multi strategy, fixed income and emerging markets Five Newcits funds launched on the platform in 2011

“Managers want to enter the UCITS world to tap into different sources of capital than feed into their offshore funds,” says Parsa “We can help them do that.”

Alceda Fund Management sees its independence

as a virtue No tie is dominant making for truly open architecture The individual fund umbrella approach can offer both fast time- to-market and risk containment, while the team’s experience ensures smooth execution for clients. THFJ

the UK and Germany In addition, Alceda provides

comprehensive distribution capabilities, ranging

from a sales and marketing service to organising

dedicated road shows and events It has even

drummed up media coverage and put together

timetables for one-on-one meetings with investors

Alceda’s distribution efforts not only focus on

Germany, where distribution channels include

institutional investors such as pension funds,

insurance companies and saving banks as well as

distribution platforms, but also reach the

UK and Asia

About $2.5 billion of the funds under administration

on the Alceda platform are in Newcits funds, a strong

area of growth for the company The funds on the

Daily 83.3%

Weekly 16.7%

Fig.4 Liquidity Source: UCITS Hedge

UK 16.7%

Rest of Europe 16.7%

Germany 66.7%

Fig.3 Manager location Source: UCITS Hedge

“We shape the product for what is best for

the investment strategy, not the other way round.”

CITS hedge platform providers make great

play of the time to market advantage that

they can confer on their clients And indeed

the platform sponsor can be so adept at their own

part of the process (and in co-ordinating the work

of other advisors and other service providers) that

the project management element of getting to the

point of launch is often well executed So the UCITS

hedge fund can be brought to market promptly

Lyxor, the asset management business owned by

Société Générale of France has emphasized how

long it has taken them to get to the point of starting

their own platform for alternative funds in the

UCITS format

“It took us over a year to launch our UCITS hedge

platform, which we call Lyxor Dimension,” explains

Nathanael Benzaken, Lyxor’s Head of Managed

Account Development, “because we wanted to

make sure that we structured it in the right way

Also we wanted to make it scalable, i.e to have the

infrastructure in place and the capability to add

funds relatively quickly.” It could not have been the

specific knowledge that was lacking – Lyxor has been

in the hedge fund business for 13 years, and has a

fund of funds operation, structuring capability

specifically related to hedge funds, a hedge fund

index family of products and the well-know managed

account platform business

Conceptually Lyxor are coming at running a platform for UCITS hedge funds differently from most providers “We take the view that a UCITS hedge fund

is still a hedge fund,” expounds Benzaken “We are bringing hedge fund strategies into the UCITS arena with the objective to deliver genuine hedge funds capable of delivering a strong value proposition for investors while limiting the potential performance drag from the UCITS constraints To achieve this,

we focus on managers with a strong investment proposition focusing on alpha generation.” To reinforce the emphasis Lyxor puts on parity between onshore and offshore hedge funds, if the UCITS version of a given hedge fund would be a pale copy

of the strategy, Lyxor would pass on that strategy,

“because in the end it will disappoint investors”

explains Benzaken

Lyxor has developed a range of UCITS hedge fund index products which are based on the platform, and has a number of UCITS funds of hedge funds on Lyxor Dimension There is a Lyxor Absolute Return Fund on the UCITS hedge platform, too Illustrating Lyxor’s vision of what a UCITS hedge platform should seek to

do, the first external manager on the platform is the Lyxor/Old Mutual Global Stat Arb Strategy Index Fund which was launched in August Statistical arbitrage strategies seek to generate alpha by exploiting short-term liquidity mis-pricing through a very liquid, very

diversified global equity market neutral approach Lyxor found a way to put the full investment strategy into the UCITS format without tweaking the strategy

at all “This is a pure hedge fund in a UCITS wrapper,” claims Benzaken

The Lyxor/Old Mutual Global Stat Arb Strategy Index Fund gives access to a global market-neutral equity fund, which has very low correlation to the equity market, and at the same time is extremely liquid The Lyxor view is the UCITS hedge fund universe needs more of these managers focusing on alpha generation and lower correlation Lyxor’s objective is to add more managers that qualify with these criteria to the platform; that is to carry on putting good hedge funds

in a UCITS wrapper Whilst Lyxor has over a hundred hedge funds on their offshore managed account platform, their ambition for Lyxor Dimension, the UCITS hedge platform, is to on-board 10-12 new funds over the next year Clearly, management expects to

be very selective for a while yet

Having the tools

Lyxor, as a long standing investor in hedge funds, believe it has the tools to be appropriately selective Lyxor has an embedded investment culture It has 10 analysts of hedge funds and has the software toolkits

to analyse hedge fund portfolios and break down the risk attributes The firm also has a tried and tested

Lyxor Asset Management

Combining the elements to industrialise the process

SIMON KERR

U

Fig.1 Investment Strategy

Macro Discretionary 6.3%

Fund of Funds 87.5%

Relative Value 6.3%

Internal Funds 87.5%

External Managers Funds 12.5%

Source: UCITS Hedge

to play There are more than 25 sales staff at Lyxor, which senior management described as “based on all the continents.” In addition Lyxor has a client service team and its own marketing team

On top of direct sales Lyxor utilizes contacts with other distributors, such as networks set up by asset managers and private banks These are existing relationships that have matured through work on other Lyxor products, which are themselves hedge fund related A large proportion of the potential capital flows will come from the likes of insurance companies and pension funds After that the most significant source of demand will be from private banking customers, according to Lyxor Another potential source of interest could be funds of UCITS hedge funds, according to the French alternatives specialists

due diligence process; and knows how to recognize

style drift According to Lyxor, this is what is missing

from the approach of many of those running platforms

for UCITS hedge funds – an understanding of risk

management and the investing side

The upcoming period is a busy one for scheduled fund

launches Lyxor has just added two new funds at the

of January Management’s intention is to broaden the

Lyxor Dimension offering first by adding funds that

offer a range of investment strategies The planned

launches encompass a short-term CTA run by IKOS,

and a long-term CTA fund, an emerging

markets-focused CTA operated by Caxton and an event driven

fund Lyxor is currently meeting managers who run

equity long/short and event driven strategies in

various markets, looking for suitable candidates

A constraint, limiting the number of funds/strategies

suitable for putting in a UCITS wrapper, is scalability

“The market for UCITS as a whole is a large market

and UCITS hedge funds are a growing part of it, and

we have to secure enough capacity with a manager to

meet the potential demand,” explains Lyxor’s Head of

Managed Account Development

When it comes to distribution, a capability which is

a highly ranked factor in platform provider selection

by managers, Lyxor Dimension has a strong hand

Lyxor’s mindset in structuring UCITS hedge funds – a real hedge fund in an onshore wrapper – is different from most platform providers The firm has put its own in-house products on the platform first to iron out the wrinkles of a start-up operation before welcoming externally managed funds

The first externally managed fund on Lyxor Dimension

is in a strategy that some platforms may struggle to work with, demonstrating the technical proficiency of the platform On top of that the distribution capability

is bigger than most in direct sales staff, and the marketing capabilities go well beyond that Whilst the high quality infrastructure has yet to be tested by a mass of external managers, there are strong elements

in place for Lyxor Dimension to realize the ambition to industrialise the processes of a UCITS hedge platform for manager clients and investors alike.THFJ

Fund Domicile

Custodian Administrator Prime Broker

Majority of Dimension Fund domiciled in Luxembourg; Single Manager Funds domiciled in Ireland

CACEIS (part of the Credit Agricole Group) for most funds CACEIS (part of the Credit Agricole Group) for most funds Wide Range (over 10 available)

Fig.4 Liquidity

Weekly 15.4%

Daily 84.6%

Source: UCITS Hedge

Fig.3 Manager location

New York 6.3%

Paris 87.5%

London 6.3%

Source: UCITS Hedge

n alternative UCITS platform needs to offer a range of investment strategies

to build a diversified offering to attract a broad selection of investors over

time Deutsche Bank, including a wide range of internal funds, offers such

diversity with around 70 funds

But even in the midst of such a wide offering, stretching across Newcits and

absolute return products, one fund stands out It is the DB Platinum IV dbX

Systematic Alpha Index, driven by Winton Capital’s managed futures strategy,

which leads Newcits funds with over $1.6 billion AUM This has helped Deutsche

Bank take the top slot amongst platform operators with AUM of nearly $2.49

billion according to our UCITS Hedge database

It demonstrates the scope that there is for successful asset raising,” says Alex

McKenna, head of fund structuring, at Deutsche Bank “We are looking to build

on that.” If 2011 is any guide – when the platform added alternative UCITS from

Paulson & Co., Omega Overseas Partners and Sloane Robinson – the New Year will

see DB Platinum sign up more top-ranked managers

14 UCITS Hedge Funds

DB Platinum IV QCM GDP Index Fund

DB Platinum Tosca Mid Cap Equity Fund

DB Platinum IV dbX Millburn Multi-Markets Index

DB Platinum FX Concepts Global Currency Fund

DB Platinum IV dbX Systematic Alpha Index

DB Platinum V Hermes Absolute Return Commodity

DB Platinum AIMhedge Index

DB Platinum IV Ikos FX Fund

DB Platinum IV Lynx Index

DB Platinum IV Paulson Global

DB Platinum Traxis Global Equity Macro

DB Platinum Sloane Robinson Asia

DB Platinum Omega

DB Platinum IV Fortinbras PRISM Index

Deutsche Bank Platinum

UCITS Hedge Platform Survey 2012

A

Fig.4 Investment Region

Global All 69.7%

Global Emerging 3.0%Europe All 3.0%

Asia All 3.0%

Global Developed 9.1%

Europe Developed 12.1%

Fig.2 Liquidity

Weekly 33.3%

Daily 66.7%

Source: UCITS Hedge

Fig.3 Manager location

London 81.8%

New York 12.1%

Stockholm 3.0%

Liechtenstein 3.0%

Source: UCITS Hedge

Fig.1 Investment Strategy

Long/Short Equity 9.1%

Relative Value 12.1%

Fund of Funds

12.1%

Macro Systematic 42.2%

Multi-strategy

9.1%

Event Driven 6.1%

Macro Discretionary 9.1%

Source: UCITS Hedge