Could Ucits III kill the listed hedge fund sector?

Listed hedge funds could find themselves under pressure from the rise in popularity of Ucits III funds according to investment trust analysts.

With many hedge fund providers able to offer investors absolute return mandates within a Ucits III wrapper, some investors are plumping for the reassurance of not having to worry about the additional concern of liquidity or share price volatility.

Winterfloods head of research Simon Elliott argues that while some experts believe the current  upsurge in volatility should play into the hands of listed hedge fund strategies,  many investors are opting for the open ended absolute return mandates instead.

Despite performance among many of the surviving, slimmed down hedge funds having improved markedly over recent months, and many discounts narrowing sharply as market conditions eased, Elliott notes the increasing popularity of the Ucits III style fund.

He believes that despite succesful recent tenders, such as that of  Dexion Absolute GBP (Ordinary Share) , all is not rosy for hedge funds.

He said: 'The demand for absolute return mandates has increased recently with market conditions becoming more volatile. In theory, this should benefit listed hedge funds but we believe many investors remain wary of the closed ended fund structure with its additional share price volatility and the problem of liquidity, particularly for the smaller funds.'

'A number of hedge fund providers are increasingly offering products in a UCITS III wrapper. This avoids discount volatility and offers attractive levels of liquidity.'

Elliott also notes that other alternative structures are also being used, such as Marshall Wace's new ETF version of its Tops strategy.

He added: 'Clearly, not all existing hedge funds could embrace either a UCITS III or even an ETF structure, as some strategies cannot be accommodated due to restrictions on gearing or liquidity.'

Elliott believes investors will need  to decide whether such strategies warrant the extra concern over risk or discount volatility and concludes that the relative performance of existing listed hedge funds against their Ucits III counterparts will be the decisive factor.