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Liberum sees Ucits III threat to listed funds

Investment bank Liberum Capital sees Ucits III funds of hedge funds as a threat to listed funds of hedge funds but believes the listed sector provides the only viable way to access illiquid investment strategies.

In Liberum’s Alternative View research for May 2010, alternatives and funds analyst Alan Butterly points out that Ucits III regulation limits strategy exposure and that listed hedge funds can provide access to more esoteric investment strategies.

Butterly says listed hedge fund products were designed for investors who want liquid exposure to the hedge funds sector. Ucits III funds will obviously compete with listed funds because they are also designed to provide better liquidity than traditional hedge funds.

Butterly says there are lots of restrictions on the positions they can take as the need for liquidity in the underlying investments, which must be at least fortnightly but preferably daily, rules out some strategies. He says Ucits funds tend to focus on more liquid strategies such as long/short equity and managed futures while strategies such as distressed debt would be difficult to provide within a Ucits framework.

Butterly says: “Ucits offers some of the hedge fund strategies in a liquid form but there are lots of restrictions on the positions they can take.

“The argument for Ucits is why would you buy a closed-ended fund with the risk of a discount to net asset value when you can by a Ucits fund with NAV certainty. But with Ucits III hedge funds, you are not getting exposure to the hedge fund sector, you are just getting exposure to a part of it.”

In the Alternative Review, Butterly recommends the listed fund of hedge funds Dexion absolute as the best option to gain general diversified hedge fund exposure.

The fund was recommended due to its liquidity and the potential for its discount to narrow.

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