“Oxymoron – a figure of speech that combines contradictory terms.” Fraser McKenzie of 47 Degrees North, based in Pfäffikon in Switzerland, says advisers should look closely at the promises and delivery of Alpha Ucits.

There is no doubt that the Ucits structure applied to hedge funds carries some benefits for investors – better regulation and more favourable tax treatment for starters.

It set in motion the ‘democratisation’ of hedge funds, rightly giving retail investors a chance to protect their capital during bear markets. Also, any effect the Ucits structure might have on forcing the offshore hedge fund industry to raise its corporate governance game must be applauded.

But when you add up the investment constraints imposed on Ucits-compliant hedge funds it is not hard to imagine that returns could suffer. Liquidity requirements, concentration limits, issuer risk levels and the exclusion of commodities almost certainly mean that returns become more dependent on general market movements than on manager skill.

This suggested negative correlation between investment red tape and alpha generation has led sceptics to call Ucits hedge funds “beta grazers”. Some would add that the much over-worked “alpha Ucits” label is a contradiction in terms.

Ucits red tape also begs the question; why would a successful offshore hedge fund manager want to launch a Ucits hedge fund? It may be because it is an easy way to raise money and boost fee income, although the high-profile closure last year of a Ucits CTA hedge fund suggest it may not be so easy.

If the best offshore managers have little incentive to enter the onshore arena then perhaps there is a negative selection bias at work, ensuring the space is populated by more business-minded and less-able investment managers.

The question we at 47 Degrees North faced when asked by a family office to advise on the selection of Ucits hedge funds was, are there any successful ‘alpha-hunters’ out there? Never wanting to turn down a challenge, we decided to put our selection skills to bear on the Ucits-compliant hedge fund universe. By way of background, we read some academic papers, sifted through reports from database providers and participated in the debate of the issues.

Some research purports to show that Ucits hedge funds outperform offshore hedge funds on a risk-adjusted basis – especially when you take into account the better liquidity terms of Ucits hedge funds. It’s probably too early to say who produces the better risk-adjusted returns, especially as any reasonable analysis would have to be done over a full market cycle.

However, one spectacular example illustrates the nuances of adjusting return expectations for perceived levels of risk.