Don't use Ucits for the wrong reasons, says Guinness family office

'What's good enough for the Guinnesses is good enough for me' is a view Iveagh Private Investment House would like investors to adopt the world over.

The London-based firm manages the famous brewing family's money and also offers the Ucits III-compliant Iveagh Wealth Fund to external investors, and last month it launched a 'Newcits' strategy. That is, it has carved out from Iveagh Wealth a stand-alone hedge-fund product, a Ucits fund of funds investing in Newcits-compliant funds. This is another example of the trend for Ucits fund marketers to increasingly target Asian clients.

Chris Wyllie, portfolio manager of the £220 million Iveagh Wealth Fund, is something of a champion of the Ucits format. He believes managers using it must be absolutely comfortable with providing at least bi-monthly liquidity and maintaining it throughout the investment cycle.

However, that may not be the case for some firms, thanks to the imminent announcement of new rules under Europe's alternative investment fund manager (AIFM) directive, Wyllie told AsianInvestor during a recent trip to Hong Kong.

"There are bound to be a few who are trying to launch Ucits III hedge-fund strategies for the wrong reasons, in that they're desperate to shoe-horn their strategy into a regulated product because they're worried about the impact of AIFMD," he says. "And it might be a strategy where they're really stretching the rules to the limit."

Of course, many managers are introducing Ucits because their investors want to have the transparency and liquidity the structure provides. For example, Hong Kong-based Galaxy Asset Management says client demand was the main driver behind the Ucits version of its China Opportunities Fund.

The central point is that managers of Ucits funds are under an obligation to manage their liquidity appropriately, says Wyllie. "Liquidity, as we all know, is a movable feast, and there's a degree to which it has to be principles-based," he adds. "And that's the area where it could conceivably get a bit grey."

For instance, Wyllie notes that mortgage-backed securities products are being mooted for inclusion in Ucits III products, something he's sceptical about. "The question is: can you always be sure you'll have the underlying liquidity there?" he asks.

In the past, problems have emerged in the long-only mainstream asset classes, Wyllie says. Ucits III property funds have first applied redemption penalties and then put in gates, which -- if applied -- are more likely to be measured in days than weeks or months, or indeed years.

Still, such issues will not be as big an issue as some have suggested, Wyllie argues. "It's not the end of the world if it happens, and it's not going to blow up the sector," he says. "And if it does happen, the scale won't be anything like as pronounced as we've seen in the offshore space -- with people being locked in for three years -- and it will be much more manageable."

Nonetheless, it can and should be avoided, Wyllie suggests, and firms can significantly reduce the risk of having insufficient liquidity by using a fund-of-funds provider, for example. That's one of the strengths of Iveagh's portfolio sub-advisor, 47 Degrees North, with its substantial experience in the offshore market, he adds. "They're really well placed to judge, with us, whether a manager can meet the liquidity requirements through the cycle," says Wyllie.

Still, one Singapore-based sales executive at an international asset manager suggests that it's possible for hedge-fund managers to severely bend the Ucits rules in terms of the types of assets they invest in.

But Wyllie says it would be "incredibly difficult" to persuade a trustee to bend the Ucits rules for a fund manager. "Trustees are always very risk-averse, and there'd be nothing in it for them [to do that]," he says. "All their incentives are the other way."

Meanwhile, Iveagh's own penchant for Ucits is not likely to do the firm any harm in Asia, going by the growing popularity of the standard in the region, as well as in Europe.

The investment house already has investors based in Asia and IFAs distributing Iveagh Wealth. Although Iveagh's clients tend to be expatriates and therefore offshore for regulatory purposes, says Wyllie, the firm would consider local registration in Hong Kong and Singapore in future.

Iveagh is also exploring the potential in India and is talking to a large firm, he adds, but would give no more details at this stage. Moreover, Wyllie stopped off in Dubai on the way to Hong Kong this time around; Iveagh is just starting to look at the Middle East market.

In terms of other relationships in the region, Iveagh has a partnership with a "very large and prominent sovereign wealth fund" that uses the UK firm's research and collaborates with it on its own quarterly research.