With impending European regulations expected to make it all but impossible for U.S. hedge funds to take capital from foreign investors, hedge fund firms are turning to the UCITS III structure (Undertaking for Collective Investments in Transferable Securities) as a way to legally avoid any such restrictions.
York Capital Management and Goldman Sachs Asset Management are the latest to use the UCITS III structure to create passports that will enable the New York-based firms to continue attracting overseas investors regardless of rule changes.
York set up its UCITS III structure with the help of Bank of America Merrill Lynch, becoming the firm’s third hedge fund client to do so. The other two were Marshall Wace and BlueCrest Capital Management, both out of London. The York Event-Driven UCITS Fund, which launched in late July and is jointly managed by York chief executive and founder Jamie Dinan and Daniel Schwartz, the firm’s chief investment officer, raised more than €50 million in its first two weeks of operation.
The Goldman Sachs Fundamental Equity Long-Short fund, which is expected to launch in September, will be managed by that firm’s global chief investment officer, Eileen Rominger. Both firms follow the lead of Highbridge Capital Management, which established a UCITS III structure through JPMorgan a few years ago.
The UCITS III directive, a European regulatory framework initially designed to ensure transparency for mutual funds, enables funds using the structure to market to investors in the 30 countries of the European Economic Area.
The structure’s flexible terms, which allow hedge funds to maintain liquidity and diversity, have made it extremely popular among U.K. and European hedge fund managers over the past year. UCITS are now starting to generate similar interest among U.S. hedge fund firms. Those not UCITS III compliant will not be able to register for sale to investors in the European Economic Area.
“With hedge funds experiencing a liquidity crunch and a lot of investors worried about derivatives exposure, excessive leverage and suspended redemptions, the UCITS wrapper has a lot of features that investors are really focused on right now,” says Graham Seaton, a director in Bank of America Merrill Lynch’s prime brokerage group in New York.
With investors seeking greater transparency and risk management, Seaton says hedge funds are increasingly seeking a middle ground that enables them to move beyond the traditional fee structures for hedge funds and for long-only money.
With UCITS III funds monitored by regulators and focused on liquidity and the safety of investors’ assets, Seaton says it is not surprising that the structure’s popularity for alternative strategies has grown beyond the European Union."Our view is that this will quickly evolve into a global standard,” says BofA’s prime brokerage head Peter Donovan. BET
