EUROPE: UCITS Hedge Funds are competitive

Monday October 11 2010

A recent study on the performance of alternative UCITS Funds reveals that they are not regularly outperformed by Non UCITS Compliant Hedge funds on a risk adjusted basis.

Non-UCITS-III-compliant hedge funds do not regularly outperform their more heavily regulated siblings, according to new research.

The Research paper published by Nils S. Tuchsmid and Erik Wallerstein from the Haute Ecole de Gestion in Geneva, and Louis Zanolin from NARA Capital confirms that UCITS funds are substantially less risky than other hedge funds. The study also found some cross-sectional evidence that less-regulated funds do outperform UCITS funds, however this is based on a short sample period and it still remains to be seen whether this will change.

In terms of excess returns the findings point to mixed results. Over the period 2008 to 2010 the UCITS alternative indices used for this research have outperformed the non- investable HFRI composite and HFRI fund of funds indices. Extending the sample period to begin in 2006, the UCITS Alternative Global Index has lower returns than the HFRI composite index while it has higher returns than the HFRI fund of funds and the HFRX composite indices.

The authors conclude that these levels are likely to remain for the future since estimations of risk is usually persistent over time, albeit this is not the case for mean returns.

It has also been noted that it is still early days for the alternative UCITS segment and if it fails to deliver, investors will be faced with a situation of high fees for mediocre performance and only with time will the industry be able to judge whether arguments regarding better liquidity terms or better regulatory protection will justify this scenario.