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Why Ucits III funds are not for the faint-hearted

Multi-manager View

The Ucits III market has grown rapidly over the last couple of years. The IMA absolute return sector, which accounts for the majority of the funds in the Ucits III space and is currently under review, has increased from 17 funds in April 2008 to 61 funds today and the assets under management grew from £1.2bn to £16.6bn over the same period.

In the aftermath of the 2007/08 financial crisis, this is not altogether surprising. With the scars still raw, investors are looking for some protection on the downside and for volatility to be ironed out. Yet for many, making the leap into the unregulated and complicated world of hedge funds is a step too far.

The advent of Ucits III has provided a solution as the main concerns surrounding hedge funds are dispelled within this sector. For example, take the liquidity issues that a number of hedge funds experienced in the eye of the financial storm in 2008. With Ucits III funds, there is far greater liquidity in the market and funds are valued daily in the vast majority of cases.

The result is that investors will not be subjected to the horrors of not being able to get their money back when they ask for it. More important, and in stark contrast to their hedge fund counterparts, Ucits III funds are all regulated, meaning they are far more transparent.

Furthermore, the benefits of absolute return strategies are plain to see. The Investhedge Global Multi Strategy dollar index returned more than 60 per cent between August 2000 and February 2011, compared to an equities return of roughly 20 per cent for the MSCI World index.

These valuable long-term returns were also achieved with significantly lower volatility and downside risk, although they were not immune to the events of 2007/08.

But the IMA absolute return sector contains many different animals and the disparity of returns is vast. The difference between the best and worst performing absolute return funds in the 12 months to March 31, at 29.71 per cent and -11.91 per cent respectively, was a staggering 41.62 per cent.

This means it is a very tricky sector for investors to pick out winners. The risk of getting fund selection wrong is great and has severe implications on overall returns. It also means investors should be careful not to take the title absolute return too literally.

Ucits III has provided some common, middle ground between traditional funds and the hedge fund world, resulting in many good hedge fundlike funds. But though the sector throws up many opportunities, it also poses a few problems because identifying the quality funds is not straightforward. Carefully researched fund selection is going to be crucial and it will make sense to pass this job on to an expert.

Graham Duce is co-head of multi-manager at Aberdeen Asset Management


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