The estimated $200bn Ucits liquid alternatives market is set to maintain its rapid pace of growth says Neuberger Berman, the manager which itself added a Global Long Short Equity fund to its own Ucits platform in March.
The manager launched its first related products in 2013 – the Global Bond Absolute Return and Absolute Return Multi-Strategy funds. These were followed in 2014 by the US Long Short Equity and Long Short Multi-Manager funds.
“The strategies seek to generate absolute returns, limit steep drawdowns, smooth volatility and increase portfolio diversification via lower sensitivity to the overall stock market,” the manager said.
Fred Ingham, head of International Hedge Fund at Neuberger Berman said that investor interest in alternative strategies was being given a boost by the ongoing environment of poor yields on fixed income assets even as valuations of equities have been run up. Coupled with increasing onshoring of hedge funds, investors in Europe have had increasing access to regulated alternative investment vehicles.
Ingham said that the manager broadly defines the liquid alternatives universe as referring to alternative strategies within the regulated funds universe in the US and Ucits, ie, 1940 regulated mutual funds in US, typically offering daily dealing, and Ucits alternatives, funds typically with unconstrained mandates and absolute return targets.
Investors are also attracted by the changes to fees that have been occurring in recent years, in the wake of the global financial crisis. The response from investors to that crisis is the first of three key reasons why Ingham sees continued downward pressure on fees charged by hedge funds.
The second key trend has been a focus of flows from larger institutional investors and sovereign wealth funds into the 50 largest hedge funds, driven by their need to limit the proportion of their own money that makes up these funds’ AUM. Typically they will limit themselves to accounting for 5% of money invested in a hedge fund, which necessitates investing in the biggest such funds. Thus a large proportion of the estimated $2.9trn invested in hedge funds has been directed this way. For funds that are smaller, it has necessitated a change to fee structures.
Finally, Ingham sees an effect on Ucits from the way 1940 Act mutual funds have developed in the US. The regulations there mean that it is very hard for funds to charge performance fees. This has led to more flat fee products in the market, and a focus on TER, which means more pressure on managers’ fees.
For providers such as Neuberger Berman, which have previously set up strategies to serve the US market on this basis, and which are now replicating these strategies in the Ucits environment, there is an effect from the US model on the European model, and resulting downward pressure on fees. Ingham expects alternative Ucits funds to increasingly move to the flat fee model also, or retain performance fees but with lower base fees.