Lansons Conversations

Newcits or lose-its? (Part 1)

The fanfare that heralded the arrival of ‘newcits’ hedge funds has tailed away, and may commentators are now advising a much more cautionary approach. I don’t think that sentiment towards newcits has yet reached its nadir, but with Paul Marshall using his interview with Paul Myners at the Funds Forum in Monaco to join the chorus of disapproval, perceptions are definitely on a downward trajectory. But why, and should we be concerned that there are more long-term reputational issues at stake here? The answer to the second part of that question is ‘yes’, but lets not get carried away just yet. To answer the first part and to qualify the answer to the second part, let’s just review where we are. As defined by Citywire (who claim to have coined the phrase), ‘newcits’ funds are “hedge fund style absolute return options for UCITS investors”. For the uninitiated, these are essentially versions of existing hedge fund strategies that have been tailored to meet the UCITS III rules. For tailored you could read “watered down”. However, this is only a broad, general definition. There are many funds classed as ‘newcits’ which are funds in their own right and are not based on an existing hedge fund or other vehicle, and for some strategies (such as long/short) which require little ‘watering down’ to make them UCITS compatible. For a beleaguered, capital starved hedge fund industry, the attraction of the UCITS wrapper is easy to see. Suddenly, there’s a new market out there. The ‘retail’ investors who purchase UCITS funds would have little past experience of being gated or on the receiving end of some of the hedge fund world’s less than desirable practices of the last couple of years. Moreover, having been badly burned by traditional long-only equity funds during this period, the concept of absolute return looks attractive. And in an increasing DC world, a greater selection of alternative strategies through which to help fund your retirement should in theory be a good thing. For the particularly beleaguered and particularly capital-starved fund of hedge fund universe, research earlier in the year by the IGS Group clearly showed an acute interest in the UCITS III structure. This is now being actioned and we are seeing an increase in such funds being launched, in a variety of formats. So what’s the problem? Ultimately this comes back to the innate conflict between “asset management” and “asset gathering”. The two concepts aren’t mutually exclusive by any means (and the opposite is generally true when you consider the most successful, sustainable fund management businesses), but lets not forget that it was “asset gathering” that helped get the hedge fund world into the mess it is currently in. By this I mean the desire to sell product above and beyond what was actually deliverable and desirable. This is what led to the colossal liquidity mismatch and the disparity between what investors understood as ‘absolute return’ and what they had actually been sold. The newcits world is one of traditional fund marketing – which in recent years has been dominated by the asset gatherers, not the alpha generators. We shouldn’t paint all newcits with the same brush, but its clear that for some (but not all) fund managers newcits offers an escape from the hell of the last two years, and the danger here is that we move from one mismatch to another. Not liquidity this time, something else? But what? To be continued……