(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.”
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.