UPDATE 1-Executives sound warning on hedge fund Ucits boom

* APG says hedge funds should not be classed as liquid

* Fear that UCITS not suited to many hedge fund strategies

* IKOS, SIG among firms launching UCITS funds

(Adds comments from Axa IM)

By Laurence Fletcher

MONACO, June 17 (Reuters) - Investors clamouring for Europe-based "hedge fund lite" portfolios in the wake of the credit crisis could still be cut off from their cash in a crisis, hedge fund executives have said.

Some commentators say these portfolios, designed to meet EU UCITS rules allowing funds to be widely sold, are not suited to all hedge fund types, and may hit problems if markets dry up and many investors want to pull out at the same time.

"It's nonsense to create these liquid vehicles. It's much better to realise that hedge funds are an illiquid asset class," said Gerlof De Vrij, managing director of absolute return strategies at APG which manages 240 billion euros ($294 billion) in assets.

Research last month showed investors have poured almost $200 billion into alternative and absolute return UCITS funds -- often dubbed 'Newcits' by the industry -- which tend to give clients quicker access to money as well as greater transparency.

The EU directive known as UCITS -- 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.

A full day of packed sessions at the GAIM hedge fund conference here was devoted to UCITS. [ID:nLDE64A1X1]

In 2008, many investors were barred from pulling their cash out of hedge funds because the market for many of the funds' underlying investments had dried up.

However, critics of UCITS funds say they can still bar investor exits and may not be the right vehicle for all investors scarred by the credit crisis.

RISKS

In March, the president of the European mainstream fund association Efama, Jean-Baptiste de Franssu, told Reuters he feared Europe was heading for a mis-selling scandal as the Newcits boom took hold. [ID:nLDE62I1K0]

"About 90 percent of strategies are fine (for UCITS), but there's always going to be the 10 percent who push the boundaries," Olwyn Alexander, head of Irish alternatives practice at PricewaterhouseCoopers, told Reuters.

"There are some strategies where there's the question of how they're going to cope if there's a crisis. Because of the brand UCITS has, is there going to be a blow-up?"

Aarnout Snouck, director at AXA Investment Managers, said: "Some strategies are being squeezed into UCITS. The label UCITS obviously gives a lot of people comfort, but at the end of the day it's still an investment in hedge funds."

"UCITS has a role to play but we need to be very careful... If a liquidity mismatch ... happens again, it's likely it will happen in the UCITS space," he told Reuters.

High-profile firms such as Man (EMG.L), GLG GLG.N and Brevan Howard have launched UCITS versions of portfolios, but Man chief executive Peter Clarke agreed UCITS was not a cure-all.

"UCITS is an interesting place for certain hedge fund strategies, but by no means all of them," he said.

Strategic Investments Group said this week it had raised $250 million for a UCITS III fund, managed by Permal Group, that will invest with a range of hedge fund managers.

Hedge fund firm IKOS is launching a currency UCITS fund this month on Deutsche Bank's platform, the firm's chief executive Elena Ambrosiadou told Reuters at the conference.

And Axa IM's Snouck said the firm planned to launch a fund of UCITS funds in the fourth quarter, investing in very liquid strategies such as equity market neutral, global macro and merger arbitrage, and hopes to raise $100 million. (Additional reporting by Martin de Sa'Pinto; Editing by Dan Lalor) ($1 = 0.8154 euro)