The market for regulated absolute products seems to be gaining traction with more than one in five respondents saying they have an existing UCITS fund and one in ten reporting managing a “40 Act” fund.
The size of the firm’s AUM seems to have a direct correlation with the types of funds managed: those with larger AUMs (of more than USD5 billion) are three times as likely to have a UCITS fund as their small counterparts (those with less than USD250 million). And larger firms are more than six times more likely than those with AUMs of under USD1 billion to manage a “40 Act” fund.
This likely reflects the increased infrastructure required to run onshore products versus offshore products.
In the short-term, there seems to be growing appetite amongst managers to open a directly-operated (as opposed to a third-party operated) UCITS fund or “40 Act” fund.. Of those that are planning or designing a directly-operated UCITS fund, the majority plan to launch their product within the next year and most of those planning “40 Act” products expect to have products in markets within the next three years.
And while the short-term market seems set to be dominated by the larger managers for the time being, it appears that there may be broader interest in developing these types of regulated products in the medium-term.
However, regulation and the stance of individual regulators may pose significant concern in the short-term. So what lessons can we take from this? According to most of the managers that we interviewed, regulation may not be the greatest force driving product design. “Products are driven by client demand, not by regulation. Our product set is based on our current strategy not on where we think regulation may or may not be going,” said one European manager. Another European manager shared the same sentiment about “40 Act” funds. “We’ve looked at 40 Act funds but more as a business opportunity than a regulatory one,” he noted.