Banks hedge bets with Ucits funds

HSBC Private Bank is pursuing a plan to deliver a new fund of Ucits III hedge funds to both wealthy individual and institutional clients, despite the problems which some of the so-called ‘Newcits’ have experienced in gathering assets. Brevan Howard, for instance, one of the major players to have entered the space along with GLG and Man Group, announced the restructuring of its Ucits III absolute return bond fund. Despite seeding the fund with $250m (€182m) at launch in January 2009, a year later assets have not breached the $300m barrier, due to lack of investor interest. Two of the high-profile fund managers who were running the product, Ian Winship and Phillip Payne, who joined Brevan Howard in 2008 from Aberdeen, are reported to have now left the group. However, other Brevan Howard Ucits-regulated funds, such as the FX Macro fund, have enjoyed more success. The key question which investors want answered is: how closely can the return which a Ucits III fund achieves actually track the performance of the offshore hedge fund which it mimics? The key difference is that Ucits III funds, unlike their offshore hedged counterparts, cannot actually go short on stocks. HSBC gets round this key clause of the regulations by buying derivatives known as ‘contracts for difference,’ explains Peter Rigg, head of the Alternative Investment Group at HSBC Private Bank, responsible for more than $30bn of clients’ assets. “There are different ways of configuring Ucits,” he says. “Contracts for difference are well established. There are other ways around the rules. Some investment banks do swaps, but we are not engaging in that, as we are low-risk.” Investors in Dublin-domiciled Ucits funds should be comforted by the attitude of the Irish regulators, which forbid complex products that cannot be explained to retail investors, claims Michael Barr, partner in the Investment Funds Unit at Dublin-based corporate lawyers A&L Goodbody. “You can’t provide synthetic short-selling without explaining what you will do to the retail investor,” he suggests. “People who do it, must be very clear about it. It’s not like doing a secret handshake in the forest.” The supplementary questions are whether investors are prepared to trade some return for better liquidity, allowing them to get out when they need their cash. HSBC’s new AdvantEdge fund certainly promises weekly liquidity, in an EU-regulated environment, as the cross-border fund is listed and regulated in Dubin, according to the group. The managers claim there is “less likelihood of sidepockets and gates” appearing in the underlying funds they are buying. It also offers UK-domiciled investors the carrot of substantial tax savings, with capital gains levied at 18 per cent rather than 50 per cent. Due diligence HSBC takes on the responsibility of doing the due diligence on the underlying funds. Currently, the bank only invests in 200 offshore hedge funds, and expects the numbers of underlying Ucits funds to be broadly similar. Sectors favoured by the portfolio management team are currently discretionary macro funds trading interest rates and currencies, distressed funds and statistical arbitrage. Many private banks and asset managers have clearly launched Ucits vehicles as a cloak for hedge funds, because it is impossible for them to sell the offshore strategies to fearful private clients, mindful of the crisis and financial disasters involving Madoff and Lehman products. HSBC, which also has the competing Halbis franchise of single strategy funds is not in this category, claims Mr Rigg. Currently, sales people prioritise the HSBC Private Bank products, which are all diversified across a range of external funds, rather than the internally-managed Halbis funds. “We have a strong conviction about this product,” says Mr Rigg. “We are talking to fund managers on the offshore side, who can replicate their returns very well in a Ucits structure. We launched this once we could put together a good portfolio.”

Peter Rigg, HSBC Private Bank