Within the last two months, at least two companies have launched platforms aimed at enabling existing hedge fund providers to create Ucits-compliant versions of their products more easily, quickly and cheaply than if they were to do so themselves.
The introduction of these new platforms coincides with a steady stream of new Ucits-compliant hedge fund launches that are widely seen as the industry’s response to European Union plans to tighten up its regulation of alternative investment funds, as well as with widespread buy-side concerns about hedge fund safety, following some highly-publicised recent hedge fund melt-downs.
Luxembourg Financial Group’s platform eventually could accommodate as many as 100 hedge funds, according to LFG chief executive Johan Groothaert, who said he is talking to a number of established hedge fund providers interested in signing up.
LFG is a specialist asset manager, platform provider and structured products bougique with offices in London, Luxembourg, Frankfurt and Stamford, Connecticut. It was launched three years ago by two former Deutsche Bank employees.
Its new hedge fund platform is a joint venture between with Ganymede Partners, a London-based institutional advisory firm founded last year by Gareth James, another former Deutsche Bank executive, whose partners include Andrew Collins and Brian Carne, previously of JPMorgan and SJ Berwin.
AIFM Directive
“Basically you’ve got a number of drivers here, one being the proposed European Union directive on alternative investment fund managers, which will make a lot of existing offshore structures obsolete,” Groothaert says.
“Secondly, hedge fund distributors are exercising pressure on them to become more standardised, transparent and more liquid. And at the same time, their clients have become concerned as well, and are demanding a higher standard.
“For such clients, particularly in Europe and Asia, Ucits is a very strong brand name.”
However, Groothaert adds, investors are not interested in buying an “unknown” entity merely because it is a Ucits hedge fund – they are interested in “those with an established brand name with a good manager and a proven track record”.
Merchant Capital
Also setting out its platform stall within the last few weeks has been Merchant Capital, a London-based financial services company that is a subsidiary of AIM-listed Merchant House Group. Merchant Capital was recently in the news after it acquired most of Arc Capital, the structured product provider that went into administration in October.
Merchant Capital’s new, Dublin-domiciled platform for Ucits hedge funds is the brainchild of Christopher Day and George Cadbury, who joined Merchant Capital about six months ago to set up its new asset management division. They came from PCE Investors, a hedge fund incubator launched by Day in 1998.
The pair’s first Ucits hedge fund to launch, in the next few days, will be a new European equity long/short strategy by Tressis SV, a Spanish funds and structured products distributor with more than €1.7bn of assets under management.
Madrid-based Tressis, which has a network of IFAs operating throughout Latin America, has chosen to use the Merchant name for the new fund rather than its own.
“The set-up and maintenance costs for Ucits hedge funds are high, and very labour intensive,” Cadbury says. “Even large hedge funds are put off by the fact that you have to keep €7.5m sitting in shareholders funds on your balance sheet in Luxembourg, while in Dublin, you have to have €635,000. Dublin is less expensive, but for hedge fund managers, it is still a significant amount of money to have sitting there dormant.”
The time it takes to construct and bring to market a Ucits product is another issue, according to Cadbury. Normally the process can take as long as six months, compared with the four to six weeks in which Merchant Capital estimates it can get a product to market.
‘No increase in risk’
Cadbury says that although Ucits hedge funds on a shared platform like Merchant Capital share the burden of the capital requirements, they do not become riskier for investors as a result, “because we, as the investment manager of record, have to ensure that the managers of the funds are complying with the Ucits requirements".
“Investors actually like the fact that we have investment specialists who are representing their interests in our oversight of their funds, rather than having the hedge fund manager doing it all themselves,” he adds. “They quite enjoy that element of third-party independence.”
Cadbury said one large (“multi-billion in assets under management”) hedge fund considering launching a fund on the Merchant Capital platform “worked out that in spite of its size, it’s actually cheaper for them to use us than to have to go out and hire two floors of their own operational staff, and also having to meet the mandatory capital requirements of either Luxembourg or Dublin.”
