Advice for Successfully Marketing UCITS III Hedge Funds
|November 20th, 2009||
|Contributed by: Lawrie Chandler, Alternative Decisions|
|UCITS III may sound like another impenetrable and needless directive from Brussels, however, it has given a new lease of life to fund managers following the financial crisis. Many fund managers are now launching absolute return funds using powers available in the UCITS directive. How should fund managers' familiar with marketing unregulated funds approach the marketing of UCITS III products? |
The main challenge is that UCITS III funds are not fully blown hedge funds and investors are not always aware of what they are buying, so getting the marketing right is important.
The UCITS III directive was primarily intended as a 'passport' for collective investment funds, allowing a fund approved in one EU jurisdiction to be automatically approved in all the others, but its impact has gone much further. UCITS III has encouraged asset managers to unleash a new breed of fund that aims to use a wide-range of asset classes, including derivatives, to make money consistently even when markets are falling. Following frauds in 2008 many investors have been drawn to UCITS III as a regulated, liquid and transparent structure.
For reasons set out below we recommend spending time to get the marketing kit right and stripping the product proposal back to the bare bones to highlight the unique selling points.
Here are a few tips for marketing UCITS III hedge funds (also commonly called absolute return funds):
(1) Education is important. The rules of UCITS do increase the freedom of what an investment manager can do but there are still limits. Knowing these limitations and how a fund manager has interpreted them is essential. Fund managers need to lay out their tools and educate prospective investors on how they intend to use them.
(2) Be aware an ugly shadow lies over some UCITS III funds. Some managers have failed to use the newly available tools successfully. To overcome these failings, we recommend demonstrating how the fund manager can add value and include some example trades (preferably showing a profit from shorting).
(3) Many investors are now starting to favour UCITS III funds where the fund house runs them as a de facto mirror of their existing unregistered hedge fund. Many groups are doing this and Alternative Decisions is the only forum we know that tracks both sectors therefore allowing investors to judge which vehicle is better for them.
(4) Sophisticated UCITS funds that are distributed to retail investors are required to be branded with an adequate risk profile. The recent implementation of MiFID has increased the requirements with regard to the adequacy of the product sold to a particular investor. Thus, the public placement of alternative strategy UCITS requires reasonable market segmentation in order to limit reputation and regulatory risks.
(5) Buyers are cautious. Be ready to expect some resistance. Whenever any sector sees a stampede of new launches, the alarm bells tend to ring out. Therefore any fund manager should spend time to build their stall and prepare a unique story to hang the fund on.
(6) Get a full kit of marketing collateral. During the product development phase spend a considerable time preparing the marketing documents e.g. pitch book, sales aid, corporate outline, etc. Many long only fund houses do not have a Due Diligence Questionnaire, this is a staple piece of marketing in the alternative community so be prepared to produce such a document. AIMA have a good template.
Our analysis of UCITS III vehicles indicates there are now over 400 funds across Europe using the UCITS III powers to target absolute returns.
Given the competition for capital and a cross-border market for these funds, getting the marketing right is imperative.