Mutual funds and UCITS with alternative and hedge strategies continue to grow and could reach $1 trillion by 2014, according to a new research paper by SEI and Strategic Insight entitled Regulated Alternative Funds: The New Conventional.

During the first eight months of 2011, more than $61 billion of net flows benefited regulated funds using alternative strategies worldwide. 

Within European UCITS, alternative strategies attracted $22 billion of net new flows in 2011 through August, following $50 billion in full-year 2010. Up until this summer’s volatility and impact on sales, gains were running at an even higher pace than last year. And 2011’s flows came despite a 90% drop in overall flows into long-term UCITS during the same period.

In an SEI press release, Jag Alexeyev (Senior Managing Director and Head of Global Research at Strategic Insight) suggested that hedge fund strategies and other alternative approaches offering enhanced management of volatility, uncorrelated returns and income, and better downside protection are gaining traction in the regulated space. 

Alternatives in Europe captured nearly 40 percent of all actively managed UCITS flows in the first half of 2011. But this progress needs to be considered in the context of the changing regulatory and fund distribution landscape.  Concern about the increasing complexity of UCITS funds using derivatives to implement alternative strategies is shaping the approach of regulators.

The paper can be requested at the link www.seic.com/NewConventional.  An executive summary also provides a few highlights.

~ Jag Alexeyev

Public Content, Subscriber Content The New Conventional, UCITS, hedge, alternative, SEI

The recent $2 billion launch in Japan of the Nomura Global Trend fund, based on Man Investments’ AHL managed futures strategy, signals an important milestone in the convergence between alternative investments, traditional regulated fund vehicles, and retail distribution.

Up to now, the mutual fund industry in Asia lagged behind in the adoption of managed futures, long-short, market neutral, and other alternative and hedge fund strategies.  In contrast, alternative approaches within UCITS in Europe and ’40 Act funds in the US attracted nearly $40 billion so far in 2011.

The volume achieved by Nomura Global Trend is remarkable considering that fundraising occurred just after the earthquake and tsunami.  In total, mutual funds in Japan collected $20 billion of net inflows during May and June with a significant proportion benefiting real estate products. 

Nomura Global Trend combines Man AHL trading strategy with three big global themes: resources, Asia, and currencies.  The product was offered in three currency classes: (1) yen, (2) a basket of currencies driven by natural resources – Brazilian real, Australian dollar, and South African rand, and (3) a basket of Asian currencies - Chinese yuan, Indian rupee, and Indonesian rupiah.  The natural resource options raised 51% of the assets, and the Asian currency options raised 27%. 

The success of this fund will encourage more alternative strategy launches in Japan, the best fund market in the world for gathering assets through new introductions.  Hedge fund and other alternative managers will likely step up their activities and look to partner with the big distributors and fund selection units, especially over time as demand for alternatives develops in Asia among both private investors and institutions (recently, for example, the sovereign wealth fund of Korea noted its plan to increase alternative allocations).

More details in Strategic Insight Global's latest commentary, Trends, Innovation, ETFs & Convergence.

~ Jag Alexeyev

Public Content, Subscriber Content Japan, managed futures, resources, Asia, currencies

My new book Capturing the Promise focuses on developments within the fund industry in Asia, and the growing volume of allocations to Asia's stock markets by fund managers in Europe and the US.  The short video below provides some highlights.

~ Jag Alexeyev

Public Content, Subscriber Content Asia, funds, regulation, distribution

On Thursday I was in Luxembourg at the ALFI european alternative investment funds conference to present on the future of Ucits hedge funds and Newcits. These products are on track to capture over Euro 30 billion of net flows in 2010, accounting for 15% of total Ucits net gains, as highlighted by ALFI's press release.

A greater number of hedge fund managers are making progress with Ucits now, and others are deciding to join the club (most recently Barton Biggs, author of the hugely entertaining book Hedgehogging). New alternative Ucits introduced in 2010 have raised Euro 6 billion – more money than new offshore hedge funds.

Our study for ALFI (PDF) details the multiple reasons supporting growth in the coming years. A well-defined regulatory framework, expanding needs for absolute returns and uncorrelated investments, and AIFMD are just a few of the drivers. The report combines analysis of Strategic Insight data with perspectives shared by industry executives through interviews conducted with the help of Sophie van Straelen of Asterias.

Big numbers attract attention. So our suggestion that alternative Ucits could see Euro 600 billion of cash flows in the coming decade was quickly noted by the media. Yet in the context of the regulated funds industry the numbers are not surprising. If alternatives’ share of Ucits inflows rises from 15% to 25% by 2020, and industry flows expand by a reasonable 5% per annum, then this cumulative amount is quite within reach.

~ Jag Alexeyev

Public Content, Subscriber Content Newcits, Luxembourg, Ucits, AIFM

From Geneva to Asia

Last week Pictet announced a new long/short Ucits III fund with a China focus. Surprisingly, the Pictet Total Return Mandarin fund will be one of the few Ucits alternative strategies that plug into the Asia and emerging market megatrend themes ... for now.

Some others include Matrix Asia Ucits, Schroder GAIA Sloane Robinson Emerging Markets, and GAM Star Absolute Global Emerging Markets. Brevan Howard is launching an emerging markets foreign exchange Ucits and opening an office in Sao Paolo Brazil.

But Pictet and its new fund may be especially worth following. The Swiss private bank turned itself into one of the most successful global money managers in a very short time.  The fifth best selling fund so far in 2010 is Pictet Emerging Local Currency Debt, with $6 billion in net flows according to Strategic Insight’s Simfund GL database. Pictet’s Global Emerging Debt fund got another $1 billion of flows this year.

The firm is raising not just money, but also the visibility of its brand. I just came back from Hong Kong, where Pictet has put its name on the many trams (locally known as “ding ding”) that crisscross the town.

Pictet's globalization has been remarkable as the firm spread out from Geneva to Tokyo (and had the best selling fund in Japan in 2007), and to Hong Kong and Asia today. Its Ucits range continues to expand around new themes, with alternatives also becoming more visible. The Mandarin strategy will follow the group’s Corto Europe product, its first long/short Ucits introduced in April that now has $300 million of assets.

As the mega-themes of China, Asia, and Emerging Markets play out, attracting more investments by the day, contrarians are beginning to worry. If they are right, then less-constrained long/short strategies, volatility and event risk plays, prudent use of leverage, systematic trading and other alternative approaches may provide more opportunities to generate alphas and absolute returns with distinct risk profiles.

Complex alternative Ucits/Newcits however are being questioned by Hong Kong and other Asian regulators, and concerns about the global Ucits brand remain unsettled.

Meanwhile, the connections between emerging markets and absolute return are growing.

Eaton Vance just announced it would soft close its $6 billion Global Macro Absolute Return fund, a U.S. mutual fund that absorbed 85% of its assets just this year. The strategy invests in both developed and emerging market investments.

As that fund soft closes, Eaton Vance is launching the new Global Macro Absolute Return Advantage, featuring more concentrated, high conviction allocations – and going by the company’s marketing and information materials (see the microsite), emerging markets may play an even bigger role in this one.

~ Jag Alexeyev

Public Content, Subscriber Content Asia, Emerging Market, China, Brazil, Global Macro, newcits

According to the wonderful character Edna Mode in the movie the Incredibles:

"Yes, words are useless!  Gobble-gobble-gobble-gobble-gobble!  Too much of it, darling, too much!"

Hopefully not all useless as the chatter on alternative and hedge fund UCITS grows.  So much that the FT just called UCITS III hedge funds “achingly trendy”.

But simple facts and data help to frame the discussion, and to explain the buzz. Notably, alternative and hedge fund UCITS captured $26 billion of net flows during 1H’10.  This compares with $35 billion during full-year 2009 according to Strategic Insight’s Simfund Global databases. 

Within the UCITS space, alternative fund inflows are twice as high as those to Emerging Market equity, a segment generally regarded as a key to the future of investment management.

Don’t bother however comparing alternatives to long-only Equity Europe funds, which once were the mainstay of UCITS.  That category suffered net redemptions of -$18 billion in the First Half.

Some alternative products show striking progress.  Flows to Julius Baer BF Absolute Return have accelerated rapidly, growing to $2.4 billion in the First Half from $1.4 billion in 2009. Other funds with strong inflows include JPM Income Opportunity, Newton Real Return, and PIMCO GIS Unconstrained Bond.

JPM Income Opportunity’s expansion is interesting given JPM Highbridge Statistical Market Neutral's contraction.  The latter's European registered fund gave up over $1 billion to outflows in the First Half, reflecting wider challenges for quant managers.

Hedge fund UCITS announcements continue, several involving US-based firms.  In our last commentary, we highlighted the big news around Paulson. This week, York Asset Management joined the party with a Newcits for Universal Investment of Germany.  And Morgan Stanley will create a Newcits run by Philip Schoenfeld Asset Management for its FundLogic platform.

Meanwhile, the absolute return "wave" is rolling through the US industry, with new offerings from Eaton Vance and Natixis, plus other alternative launches from Invesco, Columbia, and various boutiques (as covered in Strategic Insight's monthly new fund filings).

Beyond registered funds, the alternative theme resonates around the world.  Asia is no exception with China Investment Corp (CIC), the $300 billion sovereign wealth fund, expected to outsource billions to alternative and emerging market specialists.  The CIC has already allocated 6% to alternatives. 

The Wall Street Journal also reports that the CIC and other SWFs may be exploring downside hedges, such as the Black Swan Protection Protocol from Universa Investments, advised by Nassim Taleb.  Some of our clients will be able to hear Taleb speak at our ai5000 Chief Investment Officer Summit in London on October 7. 

~ Jag Alexeyev

Public Content, Subscriber Content absolute return, sovereign wealth fund, Newcits, hedge funds, alternative investment, quant

The news of John Paulson launching a UCITS fund confused a few people in the investment industry. Why would such a successful hedge fund manager, in command of billions of assets, bother with UCITS?

It is true that the “monarch of hedge funds” is facing some challenges, and may restrict access to his flagship fund.

But irrespective of individual managers’ circumstances, the industry has a good idea why Paulson and other hedge fund managers are launching UCITS (discussed in detail in our Innovation study).

More important perhaps than why hedge fund managers are entering the regulated “onshore” space is the simple fact that they are – in growing numbers – and how this will change the competitive dynamics of asset management in time.

Uncertainty over AIFM is one driver behind the Newcits phenomenon, and some think that once clarity is achieved, UCITS alternative products will lose steam. On the other hand, current net flows progress suggest the party might continue.

And at the Fund Forum in Monaco last month, the co-founder of Marshall Wace argued that AIFM and other regulatory actions could prove potentially catastrophic, hurting the asset management industry while doing nothing about leverage in the banking sector.

Meanwhile, Paulson’s UCITS is expected to be launched on the Deutsche Bank Platinum platform. Interestingly, Paulson and Deutsche Bank have already crossed paths. The db x-trackers Hedge Fund Index ETF, launched in the prior year and exceeding $1 billion, runs on Deutsche’s hedge fund platform of forty managers that includes Paulson. Below is a clip from a presentation commenting how that fund epitomizes fund industry innovation.

Public Content, Subscriber Content AIFM, Paulson, ETF, Newcits, hedge funds