By Colin Keane
Amid institutional investor demand and regulatory uncertainty around the Alternative Investment Fund Managers Directive (AIFMD), there is increased interest in alternative UCITS. UCITS attracts investors because it offers generous liquidity terms, and is onshore, something that resonates with shareholders.
UCITS – Changes and Growth
Over the years, UCITS’ strategies have evolved from vanilla bonds and equities into more dynamic offerings. Nonetheless, regulators know that the brand must remain safe (e.g. with the European Securities and Markets Authority) if it is to retain its investor appeal.
Latin America and Asia-Pacific (APAC) allocators enthusiastically buy the brand. However, the recent ASEAN Collective Investment Scheme (CIS), which permits cross-border retail fund passporting between Singapore, Thailand, and Malaysia, could pose a challenge to UCITS.
Another possible challenger is the Asian Region Funds Passport (ARFP), which would fund passporting between Australia, New Zealand, Singapore, South Korea, Thailand, and Philippines. While interest in UCITS among US investors is low, it remains one of the most reputable fund brands in APAC and Latin America.
AIFMD uncertainty is sparking interest in UCITS, with many US managers looking to unveil UCITS-compliant alternative funds. Several EU member states have gold-plated their national private placement regimes (NPPR), making it harder for AIFMs to market to institutional investors.
While UCITS has some difficulty marketing across the EU, UCITS IV makes it easier to distribute into most of the member states.
Those non-EU firms using reverse solicitation to attract capital have found it has yielded few results. Others have learned that marketing breaches could expose them to severe regulatory sanctions. Continued uncertainty about the pan-EU marketing passport being extended to non-EU managers is also pushing more non-EU firms to embrace UCITS. Since AIFMD’s costs are still unknown, many managers are pursuing UCITS as a tried and tested model.
UCITS V, due in March, 2016, will prohibit depositaries from discharging liability for loss or misappropriation of assets at the sub-custodian. It will also impose remuneration restrictions similar to that of AIFMD, as regulators seek to harmonize the two directives.
There are discussions of a UCITS VI, which some believe will facilitate a pan-EU depositary passport, so managers will not need to appoint a depositary operating in the same jurisdiction as their UCITS fund. This would benefit jurisdictions that do not have big depositary operations. There is also speculation of stricter eligibility criteria for assets that can be traded by UCITS. It is believed this is part of European regulators’ attempts to make UCITS strictly retail and AIFMs strictly institutional.
Alternative managers are recognizing the capital-raising opportunities UCITS affords. Simultaneously, uncertainty around AIFMD is prompting some non-EU managers to embrace UCITS in order to gain a European footprint.
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