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Guest Post: Flight to Mystery
Submitted by Econotwist
Flight to Mystery
Assets managed by European UCITS
III funds have increased to $52.3 billion over the last two years.
These special purpose vehicles are about to kill the traditional hedge fund industry, and are emerging as the new generation of sophisticated investment strategies.
“Using cautious estimates, projections for 2012 indicate that
over €8,000 billion will be invested in UCITS products, an increase
of 60% – from €5,000 billion at end 2007.”
Eurekahedge Pte.
UCITS - also called NEWCITS
Finally, some happy news for all the bankers who have been living in fear lately of how the new financial regulations – also known as the Dodd-Frank Legislation – will affect their business. I’m proud to announce: Problem solved!
It was Morgan Stanley who put me on the track to this brilliant solution a couple of weeks ago when they announced the launching of its first UCITS III Fund on the Firm’s FundLogic trading platform.
Since then, I’ve discovered that all the big US, and all global non-European, banks are doing the exact same thing.
They are in practice outsourcing their investment bank activity to Europe.
The new financial regulations in both US and EU are aimed at traditional hedge
funds (who have been blamed for everything from causing the financial
meltdown to climate change) and the well-known tax heavens – also known
as offshore banking.
But the financial industry seems to have found an alternative in EU’s UCITS III Funds. (Undertakings for Collective Investments in Transferable Securities).
And the alternative is about to get even better with the introduction of UCITS IV in 2011.
In fact, it’s so good that several financial institutions are
bringing their offshore accounts from places like Calman Island and
Bermuda onshore – inside the EU area.
A collective investment fund may apply for UCITS status in order to allow EU-wide marketing.
UCITS’ are a set of European Union directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorization from one member state.
In practice many EU member nations have imposed additional regulatory
requirements that have impeded free operation with the effect of
protecting local asset managers.
In other words; the EU countries are now competing to offer the funds
the best possible framework, with as few regulations as possible.
At the moment Ireland and Luxembourg is leading the race.
Morgan Stanley’s UCITS III Fund will be managed by by P.Schoenfeld Asset Management LP (PSAM) in Ireland.
Shahzad Sadique, Executive Director and Head of FundLogic at Morgan Stanley says in a statement: “We
are seeing a huge level of interest from investors to access
alternative asset manager expertise through UCITS Funds and are
delighted that PSAM has partnered with Morgan Stanley. We are currently
seeking regulatory approval for a number of funds managed by leading
alternative asset managers and look forward to launching more UCITS
funds on FundLogic in the next few months.”
(Morgan Stanley Press Release)
Mostly Illegal
UCITS III Funds are illegal to offer and sell in the US and most
other countries around the world, except within the 30 countries
connected to the European Economic Area (EEA).
The idea behind the UCITS is to create a single market in
transferable securities across the EU. With a larger market the
economies of scale will reduce costs for investment managers which can
be passed on to consumers.
However, many asset managers are using UCITS as a main channel for
globalizing their businesses with considerable interest outside the EU
and as far out as Asia and South America.
UCITS III Funds is the second version of the EU Commission’s
directive outlining a framework for investment funds suitable for
marketing to retail investors and has standardized rules for
authorization, supervision, structure and activities of collective
investment undertakings in the EEA and so to enable them to be
distributed throughout the EEA.
This significantly enlarges the range of investment instruments that could be used, notably allowing use of derivatives.
It makes it possible for hedge fund managers to launch versions of
their strategies in a UCITS version so many more investors can access
them.
According to the EU directives, a UCITS fund must be open-ended, liquid, well-diversified, invest only in certain “eligible”
assets (i.e. quoted securities, money market instruments, deposits,
certain derivatives and units in other UCITS) and can only employ
limited leverage.
Examples of Financial Derivative Instruments that can be used:
• CFDs:
Under UCITS III rules, the manager can be long up to 100% in directly
held equity securities and short up to 100% using stock specific
derivatives such as contracts for difference (CFDs) or stock specific
futures. Therefore, the fund can be leveraged up to 100% of NAV.
• Total Return Swaps: This involves investing in a portfolio and
swapping its return through a total return swap for a return that is
related to a reference basket (or index). Examples of a suitable
reference basket could be an equity long/short strategy or a commodity
index. This structure is ideal for managers that find the restrictions
of the previous option too onerous as the reference basket itself does
not have to comply fully with the UCITS rules.
• Credit Default Swaps:
CDS can be used in a number of ways in fixed income strategies, for
example hedging exposures and buy/write protection, or playing the basis
between the CDS and underlying corporate spreads.
* Certificates (either individually or in a
series) can also be used within the UCITS III framework to replicate the
risk/return profile of FOHFs. Alternatively, a UCITS eligible index can
be created to replicate all of the underlying hedge fund strategies;
the index needs to meet the UCITS criteria of eligibility though.
With any of the techniques mentioned, distribution is paramount to
global take-up of UCITS III, and has become the most dominant channels
for cross-border sales of UCITS funds, owned by third-party distributors
and open architecture platforms.
Hedge fund managers, sitting in a larger asset management company
with existing mutual fund platforms, are ideally positioned to
distribute UCITS III funds offerings, benefiting from access to a wider
spectrum of clients.
Road to Freedom
Because the UCITS lies outside the scope of the European draft
Alternative Investment Fund Managers Directive, which is likely to
impact unregulated offshore hedge funds in yet undefined ways, this is
potentially beneficial as the AIFM Directive is likely to impose
constraints on European investors investing in third-country funds, and
most likely include those domiciled in offshore jurisdictions such as
Cayman Islands and Bermuda.
However, Morgan Stanley is not one of the pioneers in this area.
Last month it emerged the world’s third largest hedge fund, Paulson & Co, is coming to Europe.
Founder John Paulson, who made a 589% and 351% profit in his two
Credit Opportunities hedge funds on the US subprime collapse, is making
himself available via a UCITS fund later this year.
But neither Paulson is the first to make his skills available to retail investors via funds domiciled inside Europe.
Others are bringing Caribbean-based product onshore because of the
EU’s plans to regulate hedge funds in such a way that non-EU managers,
including Paulson, and offshore funds, would be barred from taking money
from European investors.
One way for such managers to get around this is launching portfolios in Europe.
Marshall Wace is shifting all its Cayman Islands portfolios to Europe.
Rival Majedie Asset Management did so, too.
Gartmore and RWC Partners will make regulated variants of every offshore fund they launch now, too.
Investors seem increasingly to opt for onshore funds where one is available.
However, Dalton Strategic Partnership has drawn a line in the
Caribbean sand, and is taking steps specifically focused on keeping
offshore fund clients.
The European UCITS long/short fund of Dalton Strategic Partnership
grew from €4m at launch in February to €50m now, during which assets in
its Melchior European hedge fund stayed static, for example.
Similar stories are told at Man Group for AHL, RWC Partners for US equities funds and Gartmore for various portfolios.
The transparency, liquidity and regulatory oversight required in a
UCITS addresses investor concerns in a post-Madoff, post-credit 2008
crunch environment.
However, the regulation allows an even greater risk taking, in fact, it encourages greater risks.
Dalton’s onshore funds will double the risk-taking appetite of Melchior.
Magnus Spence, partner, explains:
“We are differentiating the products one from another, and need
to recognize and meet the different needs of investors in offshore hedge
funds and UCITS III hedge funds. Investors in UCITS hedge funds tend to
seek lower-risk strategies, which typically offer return targets of
between 5% and 10% per year.”
“In contrast, many traditional investors in offshore hedge funds
are prepared to accept a considerably higher level of investment risk in
return for performance greater than 10%.”
What Dalton’s latest move shows is that not everyone is so keen on “on-shoring” after all.
Barclay’s are among the big banks who still offer offshore products to its clients, now within the UCITS framework:
“The Structured UCITS Funds for Offshore Bonds range allows
investors access to a leading range of Funds, all approved under the EU
UCITS III Directive. A UCITS III fund refers to any collective
investment scheme set up under the UCITS Directive of 1985, as modified
by the amending proposal of 2001. As the UCITS Directive is a
pan-European directive, the main benefit of UCITS III is that it makes
it easier to passport and market such funds throughout Europe. UCITS III
allows funds to invest in a wide range of financial instruments,
opening up the range of investment strategies available to fund
managers,” Barclay’s write on their website.
Adding: “Our Fund range is developed by our asset class neutral
structuring team. Our team creates innovative products across asset
classes – developing solutions to help clients achieve optimal asset
allocation as well as manage risk. Our team specializes in delivering
quantitative asset allocation strategies within a UCITS III compliant
fund format.”
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Exporting corruption... God Bless America!
corruption, debt and war are our only true exports
It was only a matter of time before we exported those things. We have been exporting our inflation for almost 2 decades now.
F R A U D
don't forget, daveyjones the attorney.
And inflation. USA exports a lot of that.
oh i really like your character. i don't have my chinese calligraphy books with me, but it looks familiar. could you tell me, what it means? i love calligraphy. powerful art form out of china. china exports some good.
T R U T H
took me a while, i knew i recognized U.
Truth. Traditional Chinese character, also adopted in Japan as kanji and Korea as hanja.
damn that is what i called my ceramic work. oh yeah, and the V viper series. no coincidences.
If we exported the bailouts, that would be superior. Alas, we will not. Just like Ireland has to pay for Greece's bailout, a bankrupt US will leverage to bailout Europe. They are not done with the raping and pillaging. Boy does this shit piss me off sometimes. Makes me wanna type something that would bring the Feds onto my head real fast.
With TRS, all things are possible.
human beings will always find ways to get around stupid regulations.
why not just accept reality and act accordingly? (i.e. do your own DD)
hey Denninger, that's bullshit. You cant get around gold, even if no fiat is backed by it.
Enter GLD (gold backed by paper) problem solved
It's not about due diligence. It's about the fact that they are trashing the joint. They are shitting on the sofa.
I got into a fight with the head of fixed income at Bear last year (after he wasn't any longer.) The dick said that stupidity isn't a crime. I wonder if some doctor went to cut out his appendix and took out his two kidneys would be viewed as just stupid or criminal. How about if he did it for profit? These guys were criminally stupid, and they all need a nail pounded right into their frontal lobes.
Fuld just called out the NY Fed for shutting them out of a facility - Perhaps they should have included Dimon on this panel
who cares ? not me
It will all be over soon enough anyway.
I'm not sure there's really anything new with offshoring investment banking, especially by Morgan Stanley, although I greatly appreciate and applaud this post.
Morgan's been running almost all their mutual funds from India, and I believe the majority of hedge funds offshore, since it's still technically illegal in the US, isn't it?
Excellent post.
Anybody else read that as the fuckits!!! fund?
HUGHS AND KISSES FROM EUROPE BITCHES!!!
ps: THX for the Do Bro's!
Will these funds be enough to save the Euro and EU ?
also means more jobs and $ forced away from us by dems/obama
is this what jpm's commodity shift is about as well?
wrapped in a "finreg hurt us" PR line?
fascinating read, actually could follow the trail. the golden trail of deception. oh that is another commodity the USofA exports quite elegantly
d e c e p t i o n , bitches.
These banking guys are like a virus, and the body - the US, EU, Asia and SA - have no antibodies... They are a cancer... Thomas Jefferson was right in warning against allowing the banks from gaining a foothold in America...
So what happens to all of the "investors" when the EU fails?
On a similar note, conglomerate non-financial companies have also shifted out of the Caribbean and into the EU.
Is there more to this than meets the eye?
Maybe?
Global Private Equity Secondary Market
Total Secondary Funds Raised USD Billions
2000 2.1
2001 4.5
2002 4.1
2003 3.5
2004 6.4
2005 5.6
2006 6.1
2007 15.1
2008 9.5
2009 17.5
(Source: Probitas Partners; Dow Jones)
There's a lot of money going into private equity at the moment, too........
Stop whining and start creating more startups guys
Big money is coming this way!
So the next time one one of the TBTF banks blows up due to bad investments the EU gets to bail them out? Sounds good to me.
Thanks for the great respons, folks!
I just want to point out that it's no coincidence that there's a rush setting up these schemes right now.
In July nest year the EU will launch its UCITS IV:
The principle features of this new legislation are:
This enable investment companies to lure customers with products that guarantee a positive return, and at the same time promise zero risk.
Here’s an example of a UCITS prospectus, marketed by KBC Asset Management:
Disclosure of risks in UCITS III Prospectusses
You don't need too much imagination to see that this opens up another broad specter of possibilities.
And with different rules in different EU member states.....well, united we stand....at the moment...
;-)
Updated S&P500 charts:
http://stockmarket618.wordpress.com
Bring back the scary clown!
Makes sense, Ireland has 12% corporation tax and Lux will let you set up a 1929 holding co with no tax as long as you dont deal into the country. set up 10 Irish funds owned by a 1929 Co and pay sod all tax on the income.
Dublin and Lux already have plenty of staff to poach working at other fund managers.
Seems to be quite a lot US misses out on, how come you arent allowed to spread bet on financials?
I don`t understand the negative comments. UCITS III (and IV) is simply a set of common rules for european open end funds. Yes, you will still have to check the prospectus and yes, you can loose money.
You can even be defrauded, as with a UCITS3 Madoff-Feeder Fund (Herald Lux).
BUT I`d rather have a UCITS3 Feeder-Fund and sue the hell out of the Custodian, than for instance a Structured Note where the Counterparty Risk is even highlighted in the prospectus.
Update the regulations to fix this problem.
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