Deutsche: Retail driving Ucits hedge funds

Retail investors are most positive among allocators in preferring onshore to offshore hedge funds, according to Deutsche Bank, but in aggregate just over half all investors now prefer regulated funds.

Between 60.7% and 72% of wealthy individuals, their advisors, bankers and family offices prefer Ucits III absolute return funds to offshore equivalents.

By contrast, where onshore and offshore parallel funds exist, offshore found favour with between only 8% of family offices and 21.4% of private banks.

Overall, 54.9% of all investors now prefer Ucits III absolute return funds over the unregulated alternative, up from 32.9% last year.

This year, Deutsche Bank’s global prime finance group polled 184 investors managing over $2.1trn. They cited performance, investment philosophy, a manager’s pedigree, risk management and the ability to mirror offshore funds as most important topics in their Ucits due diligence.

Despite performance falling far short of hedge funds’ last year, Ucits hedge funds still met or exceeded expectations of two thirds of their investors last year.

That said, poor returns was cited, after lack of access to high quality managers, as the second biggest challenge allocating to Ucits III absolute return.

Those investors who prefer traditional hedge funds did so for reasons of performance (55%), then strategy requirements (40%), and then costs (2.5%).

Nevertheless, investors expect to grow Ucits III compliant funds to 20.3% of their total portfolios over two years. This money could go to fewer managers, though, as the study forecast 11.7% of absolute return managers are expected to go out of business this year.

Those funds that do not exceed minimum bi-monthly liquidity requirements will miss out on most private investors.

Some 92% of wealth managers, 73% of funds of funds, 83.3% of family offices, and 81.1% of private banks require weekly, or more regular, dealing. All personal advisors need weekly liquidity.

For the nascent industry, about two third of investors overall will invest to a fund running $50m or less, with 12.5% willing to finance start-ups.

They are split on track record requirements. Some 71.4% of funds of funds will commit to funds in their first year, compared to 14.3% each of private banks and wealth managers.

In return for making day one investments, most allocators (56%) expect fee cuts, and 10.3% expect capacity agreements. Some 12% expect nothing in return.

The fierce battle between Luxembourg and Dublin to be the home of Ucits absolute return funds seem much ado about nothing, in investors’ minds at least, as two thirds say they have no preference between the two.

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