The UCITS hedge funds industry has witnessed tremendous growth over the last four years, both in the number of funds and in assets under management (AUM). As at the start of 2013 the total number of funds in the industry is estimated at 949 with AUM standing at US$215 billion.
The UCITS III framework introduced in 2001 laid out various directives that allowed managers to use a wider range of techniques and instruments to help balance the tradeoff between portfolio risk and return. That framework has since been improved with the UCITS IV directive implemented in mid-2011. UCITS IV, among many other enhancements helps to provide the investor with more transparency, facilitate cross-border fund distributions, reduce costs, achieve regulatory alignment, decrease the administrative burden and achieve economies of scale for the fund management companies. As investors focus more on risk management practices and fund management transparency, existing hedge funds have started looking at the UCITS platform as a way to not only meet the requirements of regulators, but also to market their funds to new clients who were unable to invest in sophisticated products.
Figure 1: Industry growth since December 2007
Over the last few years, UCITS hedge funds have grown at a rapid pace relative to global hedge funds. Assets of UCITS hedge funds have increased their starting assets in January 2009 by the end of 2012. The phenomenal growth rate of the UCITS hedge fund industry is atypical of a nascent industry progressing into its high growth stage. Assets of global hedge funds on the other hand decreased to 68% of their starting assets in the same period as market volatility, a series of high profile frauds and the credit crisis affected the performance as well as investment flows into global hedge funds.