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

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