Ucits III allows fund managers to take short positions using derivatives, which are instruments that experienced hedge fund managers would use for investment purposes.
Thames River says Ucits III regulated absolute return funds are offered by hedge fund managers such as Brevan Howard and Marshall Wace, who see the more regulated onshore structure as a new market for which they can easily replicate their investment strategies.
But it adds that liquidity issues make strategies such as merger arbitrage and distressed debt unsuitable within a Ucits III structure, while highly geared strategies such as statistical arbitrage and fixed income arbitrage are incompatible with Ucits III due to limits on leverage.
Absolute return funds are also available from managers who are making the transition from long-only funds to the wider investment powers of Ucits III. Thames River will be monitoring managers who are learning the new skills until they build up a track record.
Thames River’s portfolio will be initially biased towards market neutral and macro funds as managers Ken-Kinsey Quick and James Rous think equities will struggle to reach their 2007 highs. They believe that volatile markets will suit market neutral managers, while factors such as quantitative easing, interest rates and government spending will suit macro strategies.
Thames River investment director Michael Warren says: “We are using managers who have the skills now within an absolute return type vehicle, the majority of which are gained through hedge funds and offshore funds.
“Absolute return experience of the type found in hedge fund managers is important, as managers have to deal with a different mindset when running a portfolio. Experience is essential when having to use derivatives structures within a Ucits III framework.”