The rise in hedge fund returns reported this week was not celebrated in equal measure by all investors, as funds with a higher level of regulation lagged less regulated funds.
Preqin, which gathers performance data, said yesterday that hedge funds had seen their best quarterly performance for three years with aggregate returns of just over 4% for the third quarter (Q3) and all strategies performing positively.
But Preqin also produced data for funds using hedge fund strategies that are regulated by the Ucits directive and the aggregate quarterly return for them was 2.16% – virtually half that of non-Ucits hedge funds.
The year-to-date Ucits return at the end of Q3 was just 0.2% compared to the 5.4% returned by non-Ucits funds in Preqin’s research.
For equity strategies, Ucits funds returned 3.26% in Q3, compared to 5.18% for hedge funds outside of Ucits.
Alternative Ucits funds have seen greater interest from investors since the beginning of the financial crisis. On Monday, Deutsche Bank reported a significant growth in assets under management for these funds.
But the lower return from Ucits funds is often seen as a trade-off for the more protective wrapper of funds under the Ucits directive, which includes higher liquidity and greater transparency.
Amy Bensted, head of hedge fund products at Preqin, told Funds Europe: “Given the nature of the Ucits wrapper, which limits the instruments that alternative Ucits can trade and the amount of leverage they can employ, it is typically expected there will be a lag in terms of the absolute returns that these funds will be able to generate.”
Benedict Peeters, who is a board member of LuxHedge that provides alternative Ucits indices, warned against short-term comparisons and said the right selection of Ucits funds could outperform hedge fund returns. Peeters pointed to a LuxHedge model portfolio of Ucits hedge funds that beat the HFR Composite Index of hedge funds in all but two years between 2007 and 2015.
“The [Ucits hedge fund] asset class should be welcomed in an environment where investors need to diversify more than before and where in Europe low interest rates explain most of the returns in bond and equity market over the last years,” said Peeters. He added that Ucits hedge funds, if carefully selected, can offer negatively correlated returns at volatility levels below 5% and peak-to-trough losses, or “drawdown”, below 5%.
Non Ucits hedge funds have seen a string of redemptions this year, and despite improving performance, data from another hedge fund researcher – Eurekahedge – showed that the year-to-date return of hedge funds at the end of September was 3.33%. This compares to the MSCI AC World Index net return of 6.60% in US dollar terms, according to MSCI, or 4.85% if the currency exposures of the parent index are hedged to the US dollar.
Eurekahedge said hedge funds was up 0.48% in September “outperforming underlying markets” as represented by the MSCI AC World Index (Local) which Eurekahedge said gained 0.19%.
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