Ucits is next hedge fund mis-selling problem, says industry veteran

The growing field of onshore alternatives funds are already forming a bubble and will be the next case of mis-selling by the hedge fund industry, according to leading practitioners.

Criticisms about the onshore industry at a recent forum convened by Opalesque – including by speakers managing Ucits products and others providing services to them – ranged from product suitability for some investors, complexity and liquidity of some strategies, and regulation of the €114bn onshore field.

Dermot Butler, founder of $50bn hedge fund administrator Custom House Group, said regulated hedge funds have been mis-sold to investors, “and I think they are going to become one of the big mis-selling themes in the hedge fund industry.

“Ucits have been a remarkable retail long-only product since they were introduced in 1986, but I think in the last couple of years a number of people have been tempted into Ucits who shouldn’t,” he said.

Loic Fery, founder of $1.8bn fixed income and credit hedge fund Chenavari Investment Managers, added strong flows into onshore hedge products – €9.8bn this year, according to Alix Capital – “is just creating the next bubble and, hopefully, this bubble will not explode too soon”.

The Ucits hedge universe added net 32 new funds last quarter, boosting the industry to 655 products, Alix found.

Having such products opened up more distribution possibilities for many managers, and enjoyed exemption from early drafts of Brussels’ contentious Alternative Investment Fund Managers Directive.

However some panelists still took a somewhat dim view of the field, reflecting similarly harsh words from ratings agency Fitch last month.

Butler, whose firm has assisted hedge funds since 1989, said Ucits products “have been sold because they are regulated and therefore they are ‘safe’ – which is simply not the case”.

He noted three or four such ‘safe’ funds were among the investors who lost a combined $65bn at the hands of Bernard Madoff.



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