Will Newcits cannibalise hedge funds' business?
Markets
by Philip Haddon on Jun 30, 2010 at 12:48
The managers and distributors of Newcits funds appear divided on who should be buying these vehicles and whether they will be used only by existing hedge fund clients.
The divisions were evident at a Ucits Hedge conference organised by the Hedge Fund Journal and held in London this week, attended by leading figures from both hedge fund and long only businesses.
Paul Graham, global head of alternatives at Gartmore, said he is striving to keep Newcits and hedge clients away from each other.
'We are conscious of cannibalising our hedge fund business,' he said. 'But the rationale of launching Ucits funds is that firms’ hedge fund books were wiped out because of liquidity, and they needed to diversify their business from a commercial perspective.'
Graham said Gartmore's move into Newcits was driven by retail investors demanding access to the firm's offshore Cappella fund, but they could not buy the Cayman version which only offers monthly liquidity. He says the firm's hedge fund clients are just not interested in Newcits.
'We see it as two different pools of capital,' he said. 'Our Ucits funds are deep retail only; there are zero institutional investors in our Ucits funds. We’ve not seen any institutional demand for Ucits hedge funds, they prefer our hedge funds.'
As well as deep retail, he has also seen a rise in Ucits fund of funds investors buying the firm's Newcits funds. But his hedge fund clients remain firmly institutional and he is aiming to keep it that way.
'We will not allow hedge fund investors to invest in Ucits products. We will not allow that kind of cannibalisation of our business to happen,' Graham said.
'We don’t see why Mrs Smith in Manchester would want to be invested alongside huge pension funds, and we don’t see why a pension fund would want to be shoulder to shoulder with 5,000 retail investors.'
In addition, he said he is seeing 'zero interest' in Newcits funds from Asia, Middle East and the US. 'All the demand is from the UK and Europe.'
Meanwhile, Doug Shaw, managing director of BlackRock's proprietary alpha strategies, said his experience with the BlackRock UK Absolute Alpha fund - one of the largest Newcits funds around - showed that most demand for Ucits hedge funds was coming from pure retail investors.
'55% of the owners of Absolute Alpha are deep retail: UK middle classes buying it under the advice of an IFA,' he said.
1 comment so far. Why not have your say?
Roland Meerdter
Jun 30, 2010 at 14:33
To get to the heart of the matter, one must look beneath the vehicle "wrapper" and contemplate the investment strategy therein. From an investment perspective, the question a manager must ask is whether the desired strategy can be implemented with the same effect and efficiency in the two vehicles in question. There are many strategies that necessitate and are appropriate for a less liquid vehicle structure (Cayman or otherwise - could also be a SIF for instance...). The Ucits structure is not a once size fits all solution. Its limitations are real and are narrower than the investment strategies of many managers.
There are also cases for (as we have seen) a "modified" version of an existing strategy being launched in a Ucits vehicle - sometimes it is good, sometimes not. There is no easy and clear line between these two and they must be defined product by product. This will keep us busy for a while.
This is not a question of just investment theory - it about making money. There is a very clear and important distinction between the commercial and investment drivers of such decisions ("to Newcits or not to Newcits...") that this article points to. Avoiding the cannibalising of a higher margin "stickier" business by providing access to an investment strategy through a lower margin less sticky vehicle is a good business strategy. Given the regulatory environment, investor demands for transparency and the commercial allure of bigger pools of money, shifts the odds. Further, there is a very large pool of investors (private and otherwise) eager for sophisticated strategies that are attracted to the attributes of the Ucits wrapper. It is not just Mr. Smith's 5.000 EUR up for grabs. In these dynamics lies the rub.
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