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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
Yet, the composition of which type of investment
managers were running alternative UCITS funds was
quite different. Whereas pre-GFC, the alternative
UCITS space was almost wholly comprised of
traditional asset managers, post-GFC, that mix
included these re-launched hedge fund products. The
moniker “Newcits” was coined to differentiate the
hedge fund-sponsored alternative UCITS funds from
those being offered by traditional asset managers.
Asset managers for the most part abandoned the
130/30 trading structure, but many began to leverage
revisions in the U.S. mutual fund laws to launch true
40 Act alternative mutual funds. While these new
funds could also go up to 200% gross exposure,
they typically ran a net position well south of 100%
and used shorting, derivatives and leverage, much
like privately offered hedge fund products. 40 Act
alternative mutual funds were also much more liquid
than traditional hedge fund products. Only 15% of
the fund’s holdings could be in illiquid instruments
that could not be exited in a single trading session.
While it was traditional asset managers that initially
offered these products, over the following few years,
an increasing number of hedge funds also moved into
this space. Between 2008 and 2013, AUM in these
strategies rose from $38 billion to $290 billion.
Finally, there was a backlash against benchmarking
in the long-only fund space and more managers
opted to become “unconstrained” in their investment
approach. This meant that they could choose to
have smaller portfolios, forego holding the full set
of benchmark components and keep a larger share
of their available cash on the sidelines rather than
being 95% or more invested at all times. This move
was matched by many investors asking hedge fund
managers to run long-only funds for them at lower
fees than in their traditional hedge fund product.
The impact of these changes in fund offerings is
illustrated in Chart 3.
The End of Distinctions by Type of
Investment Manager
By 2010-2011, many of the leading private equity firms
also began to evolve their business strategy to become
more of a full service financial firm. A key part of that
evolution was to begin to launch more actively traded
funds that encroached into the traditional hedge fund
space—either by recruiting the trading talent that was
leaving the sell-side in response to the Volcker Rule;
by outright purchasing hedge fund firms or by taking
minority stakes in these firms; or by promoting more
rapid growth in the existing fund’s AUM.
Illiquid Equity & Credit
Hedge Strategies
C
o
n
v
e
r
g
en
c
e
C
o
n
v
e
r
gence
Liquidity
High
High
Transparency
Low
Low
Passive Index
& ETF Funds
Unconstrained
Long
UCITs &
Regulated
Alternative
Funds
Liquid Equity & Credit
Hedge Strategies
Macro
Distressed
Cash & Alpha
T
ra
ditional
A
s
s
e
t
M
a
n
ag
ers
Private
Equity
Long
Only
He
d
g
e Fu
nds
Chart 4: Investment Structures in the Public Markets: 2012
Pr
i
va
t
e
E
q
uit
y
F
i
rms
Source: Citi Investor Services