LUXEMBOURG Fund industry players are increasingly concerned that the development of hedge fund-style strategies sold to retail investors under EU rules may threaten a bid to push the European brand out to emerging markets.
An EU directive known as UCITS -- or Undertakings for Collective Investment in Transferable Securities -- established a framework for a mutual fund product to protect retail investors by setting out stiff liquidity and transparency rules.
It was revised in 2008 under UCITS III to allow shorting and the use of derivatives, and some are concerned the pendulum has swung too far in favor of complex new hedge fund-style products -- sometimes called Newcits in the industry.
"With Newcits, managers are trying to put a regulated wrapper around a product that is less regulated," said Sanjiv Sawhney, global head of fund services at Citi, speaking at the Reuters European Funds Summit.
Sawhney said there is a sizeable number of hedge fund managers who are looking at this. "The pipeline is there."
Speaking to Reuters ahead of the Funds Summit, Amin Rajan, chief executive of consultancy Create-Research, said that the UCITS brand was suffering a "mid-life crisis" with pressure to create a twin-track system which divides the investor base into institutions and individuals.
"At the moment it is one size fits all," he said.
Jean-Baptiste de Franssu, president of the European Fund and Asset Management Association and CEO of Invesco Europe, said that many hedge fund managers saw UCITS as a great opportunity to develop their business across Europe.
Hedge funds have been looking to build a broader investor base as a result of heavy outflows during the financial crisis. But de Franssu said the definition of "eligible assets" as laid down by UCITS III had been pushed to the limit.
"We cannot allow such products to be brought to a wide retail audience. I have very grave concerns about this," he said.
Sawhney warned that Newcits needed to be looked at closely to check they are providing the right level of transparency to the end investor.
"One of the strengths of UCITS is that it has encouraged innovation but it shouldn't cross the border into territory where it threatens the minimum level of transparency and the reputation of the UCITS brand," he said.
Asset managers are worried because they don't want to jeopardize the adoption of UCITS by emerging markets, where they see the opportunity for much greater growth than in Europe over the next decade.
The EU has taken over 20 years to build the credibility of the UCITS brand and some 40 percent of UCITS are already sold outside the EU in Latin America, Asia and the Middle East.
Its success is also reflected in the establishment by local managers in emerging markets like Brazil, Korea, Abu Dhabi and India of UCITS in funds hubs like Luxembourg to distribute into neighboring markets. There are fears that Newcits may undermine UCITS' hard-won reputation.
"UCITS is a brand that is universally accepted, and it has a built a reputation for transparency -- Newcits should be questioned if they threaten that level of transparency," said Sawhney.
Rajan stressed that UCITS is still a kitemark of investment of excellence. "It is this that has driven its success, not the underlying returns, although in the first five years the returns were good."
(Editing by Joel Dimmock; and Hans Peters)