By Colin Keane
Until recently, traditional UCITS followed long-only strategies and offered relative returns to investors.
Late 2015 and 2016 saw significant market and political challenges; relative returns have been squeezed through rising fund operational costs, negative territory interest rates, and low bond yields. This presented a lot of problem for UCITS managers and their investors who continue to seek positive returns, and ultimately has led to a considerable shift in allocations towards uncorrelated asset classes. In 2016, there were outflows of €63bn in long-only equity mutual funds (according to Global Investor).
In order to meet investor demands, UCITS (and their asset classes) are expanding into alternative strategies. More and more traditional UCITS who have followed relative returns are expanding their asset classes through the use of derivatives, creating ‘hedge-like’ strategies to generate risk-rated returns.
‘Risk premia’ and ‘smart beta’ UCITS, which marry the UCITS brand with a tailored fund vehicle with asset classes that have low-zero market correlation, are also expanding.
This change is being driven by investors. According to a 2016 survey by Deutsche Bank, 70% of its UCITS investors now allocate to alternative asset classes.
The shift towards alternative assets classes presents incredible opportunities for alternative managers as assets migrate to more specialized sectors. There has been an influx of ‘best of breed’ alternative managers setting up or joining UCITS platforms across Europe, Asia, and the United States.
Dedicated alternative UCITS platforms continue to thrive, a positive sign for future growth of alternative assets classes in UCITS.
SS&C is the leading global provider of alternative fund services. We provide fund services to some of the most well-known UCITS managers across the globe. As the UCITS market continues to expand its asset classes, managers will encounter new challenges, including European Market Infrastructure Regulation (EMIR) reporting, collateral management services, VaR, and regulatory reporting. SS&C provides seamless service solutions for UCITS clients as they evolve.
Charles Darwin noted, it is not the strongest who survive, but those who can adapt to change. Last year, UCITS entered its fifth iteration and continues to evolve and adapt to an ever-changing landscape. Its growth is undeniable and positive, and it is clear UCITS will remain a European investment powerhouse. At the same time, alternative products that offer investors new and exciting solutions are emerging.
The next eBriefing in our investment structures series will discuss private equity and hybrid funds, continuing our focus on Investment products for investors. To learn more about how SS&C can help you with alternative UCITS investing, please contact firstname.lastname@example.org.