LONDON (Reuters) - Cantab Capital Partners is to close a retail investor-friendly version of its flagship hedge fund because of new European guidelines regulating investment in commodities, underlining the growing difficulty firms face in trading metals, grains and oil.
Cantab, which manages $5.5 billion in assets, said it is closing its CCP Quantitative UCITS Fund at the end of June in response to guidelines from Europe’s financial watchdog that make it tougher for “UCITS” funds to invest in commodity indexes.
A UCITS (Undertaking for Collective Investment in Transferable Securities) wrapper acts as a ‘passport’ enabling firms to freely sell regulated investment funds across the European Union to all types of investors, including retail.
Computer-driven funds such as Cantab are among the biggest players in commodity markets - last year it bought three seats at the Chicago Mercantile Exchange to cut its cost of trading.
Like rivals, it launched a UCITS-compliant fund to offer retail investors a product that tracks its main fund.
The popularity of UCITS has soared since the financial crisis as investors seek regulated and more transparent products. Hefty minimum investment demands have meanwhile left most hedge funds off-limits for retail clients.
But new European Securities and Markets Authority guidelines set out in December require that indexes used by UCITS funds meet strict diversification rules when trading commodities, that the methodology used to construct indexes be published and that those indexes are deemed an adequate benchmark of the market.
Existing funds have a year to comply.
With indexes designed to replicate computer trading strategies unlikely to meet the new guidelines, some like Cantab believe it is better to shut down.
“We do not believe in restricting our products or trying to circumvent rules. As a result we are saddened to close our CCP Quantitative UCITS fund,” Cantab founder Ewan Kirk said.
European and U.S. regulators have increasingly scrutinised trading of commodities since a global food price crisis in 2008 and growing worries that rampant speculation increases volatility and divorces prices from supply and demand.
The EU’s existing rules already ban UCITS from investing directly in commodities or commodity futures.
Some of Cantab’s rivals have continued to start new UCITS funds, however. Winton Capital, among the world’s largest computer managers, launched a new UCITS-compliant fund in March with Lyxor Asset Management to replicate its flagship strategy.
According to Alix Capital, a research and advisory firm which tracks the market, assets in UCITS-compliant commodity trading advisers - one of the most popular computer hedge funds - have fallen to 4.82 billion euros in March this year from 6.09 billion euros in September.
However, this follows a rise from 1.57 billion in Jan 2008.
Louis Zanolin, chief executive of Alix, said he was “quite surprised” by Cantab’s move, as managers could currently bypass the ESMA restrictions on indexes by investing in “certificates” - synthetic replications of the underlying commodities.
“Some people say it’s just a matter of time and ESMA will go after certificates but AIMA (Alternative Investment Management Association) is pushing for commodities to be included in UCITS VI. It’s a bit too early to tell what will happen,” he said.
Cantab will allow clients, who have $320 million in the UCITS product, to move their money into the original fund it was designed to track or into its new CCP Core Macro Fund.
Editing by David Cowell