Joachim Klement (pictured left), chief investment officer of the Swiss investment consultancy Wellershoff & Partners and a valued member of our editorial panel, took upon him the arduous task to investigate these two questions. As alternative Ucits products are relatively new and consist of a wide array of funds, there is no straightforward ‘liquid absolute return index’ available yet. Therefore Klement decided to create his own index, consisting of all 1105 liquid absolute return funds in his own database, calling it the Liquid Absolute Return Index (LARI).
At the surface, alternative Ucits funds seem to easily beat hedge funds: both when it comes to fees and performance they have the upper hand. The average fund in the LARI-index has a total expense ratio of 1.85%, about half of that of the median costs for hedge funds. While costs are half those for hedge funds, returns are twice as high: 0.34% per month for the LARI-index versus 0.15% for the HFRX-index of investable hedge funds.
Beware of the giants
The above numbers, however, are based on an equally-weighted index where all funds, regardless of size, get the same weighting. This is a relevant annotation, as the liquid absolute return universe is highly concentrated: according to Klement’s data, the 50 biggest funds account for two thirds of AUM. The performance picture on a market capitalisation weighted basis therefore looks quite different, with liquid absolute return funds only generating average monthly returns of 0.26%.
Volatility of this LARI MW Index (3.2%) is also higher than that of the LARI EW (equal weight) Index (2.8%), leading us to a conclusion that the biggest funds pull down the average risk-adjusted performance of liquid absolute return funds. Hedge funds outperform their liquid equivalents significantly when it comes to volatility. The HFRX EW Index has an average volatility of 1.5% (compared to 0.8% for bonds).
Alternative Ucits or hedge funds, what do you choose? “We only run liquid portfolios and don’t want notice periods of 45-90 days,”says Jaap Bouma (pictured right). “Lots of hedge funds have a UCITS spin-off. The difference in performance with the flagship hedge fund is usually not that big.” Alberto Montero manages a fund-of-funds of liquid absolute return strategies at Morabanc, a private bank based in Andorra, but would prefer to invest in “real hedge funds”, as he puts it, if given the choice. “In practice I can’t invest in those because the large majority of our clients are non-professional investors,” he says. But if given a free choice, he would opt for offshore hedge funds: “It’s more comfortable to manage money in an illiquid mandate,” he says. “The investment universe is also much bigger: the more you can choose from, the better a game you can play.”  Geert Roggeman (pictured left), who runs a small investment boutique specialised in multi-asset investments, also prefers offshore hedge funds. “Our experience with alternatives Ucits funds is that the limitations imposed influence performance, as certain strategies such as CTA’s cannot be used,” he says. “But in practice changes in regulation are driving people towards alternative Ucits funds.” |
