Institutional Investors Shun UCITS Hedge Funds

UCITS funds have found little favour with institutional investors despite a wave of them being created in reaction to the financial crisis and Madoff scandal.

(January 23, 2012) — UCITS funds and other highly regulated investment vehicles that were launched by hedge fund firms in answer to institutional investors’ demands for transparency have failed to tap into this target market, a study has shown.

Only 15% of institutional investors responding to a survey by SEI’s Investment Manager Services and Greenwich Associates said they planned to direct part of their current hedge fund allocations to a registered product such as a mutual fund or UCITS vehicle.

Only one institution with assets greater than $5 billion reported plans to shift hedge fund assets to registered products.

The SEI IMS survey reported: “The results suggest that even though institutional investors strongly desire the kind of transparency and liquidity that registered products can provide, they may be unwilling to give up the advantages that hedge fund limited partnerships offer — namely a greater range of unique strategies and the incentive that performance fees provide.”

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SEI IMS added that the cost or constraints associated with redemption of existing hedge fund investments, as well as the potentially higher asset-based fees for regulated products, may also have influenced investors’ responses.

UCITS funds had originally been designed for less sophisticated investors, such as those buying retail or mutual funds, but in the fallout of the financial crisis and the Bernard Madoff scandal, hedge fund managers began to create them to target larger clients.

The highly regulated structure meant investment pools were highly liquid, transparent, and only able to hold certain types of securities.

Of the 15% of investors that would shift into these regulated structures, liquidity was cited as a top priority by over 90%. During the financial crisis, many hedge fund managers implemented ‘gates’ on their asset pools meaning investors could not withdraw their money. This was usually due to the illiquid nature of the fund’s investments and managers avoiding unwinding positions quickly and making a great loss.

These 15% of investors were mainly at the smaller end of the scale, SEI IMS said.

“Those most likely to [move to these highly regulated structures] are smaller institutions that have less clout to demand greater transparency and liquidity and may not qualify for the minimum investment required by an unregistered hedge fund product,” the survey reported.

SEI IMS questioned 105 institutional investors. Endowments accounted for more than a third of all survey respondents whereas foundations represented just over 17%. Family offices, corporate funds, and public pension funds each accounted for another 12%. The remaining responses came from consultants, union plans, and non-profit organisations.

Participating organisations ranged in size from less than $500 million to more than $20 billion in assets. Approximately 85% of respondents were based in the United States with the rest based in the United Kingdom, Canada, and Scandinavia.

"We expect emerging Asia growth below the market consensus due to its less aggressive policy responses compared to 2008-2009," PIMCO's Asia-Pacific portfolio managers have asserted.

(January 23, 2012) — The Asia-Pacific region is likely to grow at a slower rate than the market is predicting due to its economic actions, fund giant Pacific Investment Management Co. (PIMCO) has warned, despite the area still boasting of its growth story.

Robert Mead, Isaac Meng and Raja Mukherji, members of PIMCO’s Asia-Pacific Portfolio Committee, said the Asia-Pacific region was less affected than others by Eurozone turmoil but contagion was still a risk through direct trade and the regional production chains that characterized Asia’s export-oriented economies.

The group was discussing its cyclical economic outlook for the region over the next six to 12 months.

According to a report by Mead, Meng, and Mukherji, the global economy to grow by 1.0%-1.5% in 2012, which is significantly slower than 2.5% growth in 2011 and 4.1% in 2010. “That said, European banks have provided less financing to Asia-Pac than to other emerging regions, especially Eastern Europe. The Asian banking sector is generally better prepared than its global peers: capital ratios are adequate and quality of capital is relatively high; non-performing loan ratios are still at historically low levels and banks have built up high reserves,” the repot stated.

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Commenting on key risks for China’s economy in 2012, PIMCO — which manages more than $1 trillion in global assets and is one of the world’s largest asset-management firms — forecasts that GDP will slow to around 7% on the year by the fourth quarter of 2012, which is 1.5 percentage points below the consensus. “…Banks are under asset quality and capital constraints, while the shadow banking system, which historically funded private sector property investment, also faces deleveraging pressure. As growth slows and commodity and property prices soften, we expect inflation to slow sharply, potentially piercing the lower bound of the 3.5%-4.5% forecast range, leaving room for stabilization policies to be implemented, eventually,” the report continued.

PIMCO further noted that in this environment, it favors Australian government bonds for their high credit quality, low-beta currencies such as the Chinese yuan, corporate issuers that have delevered, covered bonds, and mortgage-backed securities.

PIMCO has become increasingly vocal in its cautious view on the future of the global economy, popularizing the idea of a ‘new normal’ and urging investors to expect lower-than-average historical returns with greater regulation, lower consumption, slower growth, and a shrinking global role for the US. In September, Mohamed El-Erian, chief executive officer of PIMCO, asserted that there will be little-to-no economic growth in industrial nations over the next year as Europe’s economy contracts by up to 2%. Meanwhile, he said that the US will stagnate yet volatility will continue as a result of policymakers in Europe and the US having failed to take corrective action.

“For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero. Emerging economies will maintain faster growth, albeit not as high as the last 12 months,” Bloomberg cited El-Erian as saying during a September 24 interview in Washington. His comments came as world leaders gathered in Washington for annual meetings of the International Monetary Fund (IMF) and the World Bank.