Luxembourg

Sophisticated UCITS 

In the wake of the financial crisis hedge fund managers have been investigating alternative ways to structure their businesses in an effort to attract new clients and asset flows, and counter investor concerns about asset segregation, liquidity and fees.

 

UCITS widened the investment restrictions to allow the use of derivatives for investment purposes, as opposed to just hedging, making a range of hedge fund-type strategies possible within the UCITS framework. As a result, a number of firms began offering UCITS vehicles, and more are expected to follow.

 

Managing UCITS funds introduces a range of business complexities that hedge fund groups need to meet:


1. Client proposition and distribution strategy
Reaching critical mass is essential for implementing the investment strategy, so before launching managers need to be confident of success. This requires a clear focus on who the fund is targeted at, investors' tax status, how the fund will be distributed, how intermediaries will be serviced and remunerated, and what the fee structure will be.


2. Legal and operational considerations
The manager must determine various legal and operational issues, including:

  • Where the fund should be domiciled. 
  • What legal form should be used (SICAV, FCP, S.A.,SCA). 
  •  Which activities should be outsourced or handled internally to benefit from the best expertise.


3. People and knowledge
People with good knowledge, skills and experience of running UCITS funds are essential for the business to operate properly.


4. Risk and governance
Groups need to review risk and governance policies, and enhance them where necessary. Key areas are likely to include:

  • Conflict of interest and inducement policies.
  • Adequate segregation of duties.
  • Robust risk, compliance and internal audit capabilities.

 

Conclusion
Launching UCITS products offers hedge funds a way into the mainstream, but it entails an overhaul of their business and operational models. Most importantly, reaching target investors and meeting their needs must be at the heart of all endeavours.