Newcits: hedge funds just don’t get it

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by Angus Foote on Jul 30, 2010 at 10:39

To the outsider, a revolution can appear to be a sudden, almost spontaneous event. But look closely, talk to people who know the territory, and you usually find that sudden dramatic change is in fact the final act of a much longer process. Pressure has gradually built up, attitudes have gradually changed, until a tipping point is reached.

The arrival of Newcits has been described as a revolution in the funds business, but I think we’re still in the build-up stage and the big transformation is yet to come. In five or ten years’ time, the effect of the changes that are now under way will be clear right across the investment industry. I believe the strategies currently being launched in Newcits products will become mainstream – the standard offering.

Given the number of new products we have seen already, you might argue that my forecast is too cautious. But attitudes will need to change. At the moment, there is still a major communication gap.

Institutional investors are already buyers of pure hedge funds and so while our guest columnist Markus Hill sees significant movement in Germany, the Newcits phenomenon will be slower to take root in this space.

The fund selector community, despite its long-held desire for access to top hedge fund managers, needs better guidance on exactly how these new strategies work and how they should be analysed.

Hedge funds haven’t yet realised they need to work much harder to tap into the assets influenced by the selectors. They are used to having investors coming to them so most don’t really understand the need for proper communication and marketing – and they are horrified by the idea of talking to the press about what they do. The prime brokers who are advising them seem slightly more clued-up, but they still haven’t fully grasped the need to look beyond their traditional fund of hedge fund investors.

So at the moment, the winners look like being the traditional large long-only houses that have launched Newcits products and already know the potential investors. The hedge funds – the managers that selectors really wanted access to – are way off the pace.

The Newcits revolution can happen – it will happen – but there are still important parts of this fragmented movement that need to be connected. All sides need to step up their efforts.

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3 comments so far. Why not have your say?

Can you really say hedge funds " are used to having investors coming to them so most don’t really understand the need for proper communication and marketing "? Maybe a handful or two can say that, but not the vast majority of hedge funds. The reality is that, because of their status, NEWCITS can now be marketed in a very different way from how "offshore" hedge funds have been marketed so far, at least in Europe. That's why, as you state, the traditional large long-only houses that have launched Newcits products have been better at marketing their NEWCITS funds; they already have the more "traditional" distribution channels in place.

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Hi Angus, I fully agree with your thought. The alternative strategies will be mainstream sometimes, but only if the industry will deliver performance and will demonstrate there ability to diversifiy portfolios and/or managed risk budgets better. We have finished a 1 year analysis of publicly distributable alternative investment funds available in the german market. We have now found more than 400 funds (no double counting with share classes and currencys) and will publish the report in September. Institutional investors are about to think in the direction of absolute return and asymetric return profiles and they need them urgently. But, as always, the industry has to deliver performance, and a bad manager or crowded strategy, won´t be better, if it comes as a UCITC.

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Anonymous 1 needed this 'off the record'

Aug 02, 2010 at 08:33

It is true that hedge funds will need to step up on their marketing efforts. However, hedge funds are marketed under private placement rules while passported UCITS (which were in theory designed for retail) can be sold via any distribution channel in any EEA jurisdiction. On top of that, not all European countries allow private placement; when allowed each country has different set of rules & requirements. This is the main reason why it is easier for UCITS providers to market their long / short strategies. These can simply leverage from their existing sale streams, existing distribution agreements etc; just daily business for them. Of course they will need to make new & very clear risk disclaimers. Hedge Funds interested in entering into Newcits arena will need to standardise their marketing efforts. Personally, I believe that if Newcits are not handled properly by regulators (they must ensure providers have a very robust risk management process in place), Newcits are not going to do any favours to the decent credibility that "UCITS" has gained outside Europe (as properly regulated "retail" product).

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