Future Newcits regulation?

Our view, informed by conversations with regulators

Who would have thought a year ago, in the aftermath of the credit crunch, that there would now be such a large number of UCITS hedge funds, known as Newcits, encompassing almost the full range of investment strategies? There are not only relatively simple long-short equity funds but also an increasing number of more complex macro, arbitrage and commodity vehicles.

After two years of decline in Europe’s assets under management, such growth is welcome. Newcits are a genuine response to investor demand and, by all accounts, they are attracting new assets under management. There are now more than 200 Newcits funds and the number is growing weekly. Demonstrating the size of the market, funds of hedge funds managers now judge it sufficiently broad for them to launch properly diversified funds of Newcits.

This point of view, informed by conversations with regulators, looks at how how the conflict between welcome innovation and protecting the retail investor needs to be carefully managed. While many of the larger hedge fund managers have been running Newcits for several years, less established competitors are now beginning to do so. This has worrying implications because newer managers may not differentiate clearly between institutional and retail investors. Being less well-established, they also have smaller reputational risk and may lack the financial strength to support a fund should it run into difficulty.

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