Alternative UCITS Booming, AUM Up 30% In 2014

Mar 13 2015 | 8:24am ET

By LuxHedge -- The Alternative UCITS universe consists of 1,212 funds with around EUR 305.3 billion of assets under management as of Dec. 31, 2014. Last year, AUM in this arena increased by EUR 69.1 billion, or nearly 30%. LuxHedge’s research indicates that this growth is set to continue strongly. 

The table below provides a breakdown by AU strategy in terms of number of funds, AUM and number of funds in different tranches of AUM.

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First of all, we notice that among 16 identified strategies, only five have total AUM in excess of EUR 10 billion.

The top five strategies according to the level of AUM are:

1. Fixed Income Arbitrage
2. Multi-Strategy
3. Global Macro
4. Long/Short Europe
5. Equity Market Neutral

Fixed Income Arbitrage, Multi-Strategy and Global Macro are the most popular strategies as evidenced by AUM and number of funds available. In particular, Fixed Income funds, which were among the first funds to adopt the UCITS format, are also the most numerous.

Among our indices, the LuxHedge Fixed Income Arbitrage UCITS is also the only index having delivered a positive performance each year since 2009. It is now widely agreed by investors that exposure to hedge funds can provide portfolio diversification and better risk adjusted returns.

Many investors consider Multi-Strategy funds as a good alternative to Fund of Funds to diversify their risk without accumulating managing fees. The enthusiasm for this strategy might also be explained by their good relative performance as evidenced by the LuxHedge Multi-Strategy UCITS Index which performed better in 2014 than the LuxHedge Global UCITS Index (3.65% against 1.95%). 

Long/Short Emerging Markets and Commodity Arbitrage funds are still reporting aggregate AUM under EUR 1 billion. The extreme volatility and complex structure of the commodity market as well as the poor performance of the Commodity Arbitrage strategy as witnessed by the -4.55% return achieved in 2014 by the LuxHedge Commodity Arbitrage UCITS Index, explain the weak level of AUM. The difficulty to implement a successful Long/Short strategy in emerging markets might explain the fact that there are only 8 Long/Short Emerging Markets funds with only EUR 921 million in AUM.

More than 75% of funds have their AUM below EUR 200 million. At the end of 2014 there were 593 funds with AUM under EUR 50 million representing almost half of the Alternative UCITS universe. Among CTA/Managed Futures, Commodity Arbitrage and Currency Arbitrage strategies, more than 70% of funds have their AUM below EUR 50 million.

We can observe that in some strategies, the proportion of funds having AUM less than EUR 20 million is quite large: almost half of the funds in Currency Arbitrage and 40% in Funds of Funds are in this case. This is not surprising as the LuxHedge Fund of Funds UCITS Index performed poorly, only 0.96% in 2014 against 1.95% for the LuxHedge Global UCITS Index.

It is clear that the universe starts to include very large funds as evidenced by the 58 blue-chip funds having AUM exceeding EUR 1 billion, most of them belonging to the Fixed Income Arbitrage, Multi-Strategy and Global Macro segments.

Surprisingly, two of the 22 Long/Short US funds have AUM over EUR 1 billion. They account for more than 60% of the aggregate AUM in this particular strategy.

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Only two strategies have recorded a decline in their AUM in 2014: Commodity Arbitrage (-44.5%) and Volatility Arbitrage (-12.1%).

This is in large part explained by the extreme volatility observed in the commodity market and the resulting difficulty to perform in this environment. The year 2014 was marked by the fall in oil price, the Brent price was at USD 57.55 as of 31.12.2014 which represents a decrease of 47% compared to the beginning of the year.

This is the result of a supply-demand gap in the world attributable to the non-conventional oil production in North-America and the economic slowdown in China. The low volatility level on equity markets for two years has lead Volatility Arbitrage funds to poorly perform as illustrated by the -1.89% return achieved in 2014 by the LuxHedge Volatility Arbitrage UCITS Index.

On the other end, Long/Short US, Event Driven and Global Macro have witnessed very strong AUM growth with respectively +113.0%, +59.5% and +55.6%. In volume terms, three strategies have recorded a staggering AUM increase: + EUR 22.6 billion in Fixed Income Arbitrage, + EUR 13.1 billion in Multi-Strategy and + EUR 12.8 billion in Global Macro.

Concerning the growth in the number of funds, the strongest increase is recorded in the Fund-of-Funds segment (+24 new funds), followed by Global Macro (+21) and Long/Short Europe (+19). Surprisingly, the number of Volatility Arbitrage funds has increased by 39.1% which is explained by the apparent appeal of this strategy for fund managers.

Among our indices, the best performer of the year 2014 was the LuxHedge CTA/Managed Futures UCITS Index with 6.78% while the worst performer was the LuxHedge Commodity Arbitrage UCITS Index with -4.55%. This may indicate that the evolution of the AUM is not necessarily related to fund performance but also to a growing investors’ appetite for Alternative UCITS funds. The growth of AUM for alternative UCITS funds may also force some hedge funds to create new UCITS-compliant funds in order to respond to the increasing demand.

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