EDHEC-Risk Institute: UCITS hedge funds underperform their non-UCITS rivals, shows new study

Written on 04 April 2013.

UCITS hedge funds are typically more volatile and underperform their non-UCITS hedge fund rivals, a new comprehensive comparative study by the EDHEC-Risk Institute has found.

The finding, also show that the domicile of a fund is an important indicator of a fund’s likely performance with European domiciled funds delivering lower risk-adjusted returns compared to funds domiciled in other regions.

The EDHEC-Risk Institute study, which examined an aggregate hedge fund dataset that consisted of more than 24,000 unique hedge funds, is one of the most comprehensive analyses of the performance and risks of UCITS hedge funds and non-UCITS hedge funds undertaken in recent times.

Commenting on the results of the survey, Noël Amenc, Director of EDHEC-Risk Institute, said: “Investors are increasingly considering hedge funds as part of their investment universe, but are also searching for access to sophisticated risk management techniques within the regulated and transparent world of mutual fund products. We are delighted that this study supported by Newedge has been able to shed light on the way in which techniques are converging in the mutual fund and hedge fund universes and we think that the research will be of particular interest to institutional investors”.

Other conclusions found in the report, which can be downloaded at EDHEC-Risk Publication Convergence Mainstream and Alternative Asset Management, include:

UCITS hedge funds underperform non-UCITS hedge funds on a total and risk-adjusted basis. However, UCITS hedge funds have more favourable liquidity terms and when we compare liquidity matched groups of UCITS hedge funds and non-UCITS hedge funds we find that their performance seems to converge.

• There is an important liquidity-performance trade-off in the sample of UCITS hedge funds. Our results also show that non-UCITS hedge funds generally have lower volatility and tail risk than UCITS hedge funds, which is consistent with hurdles to the transportation of risk management techniques.

• We find important domicile effects related to firm and fund performance. European-domiciled funds deliver lower risk-adjusted compared to funds domiciled in other regions. The risk-adjusted performance is highest for North American and Asia/Pacific-domiciled funds. We find similar performance between the main UCITS hedge fund domiciles. Ireland and Luxembourg-domiciled funds exhibit very similar performance measures.

James Skeggs, global co-head Advisory Group at Newedge, added: “EDHEC-Risk Institute has a unique approach to academic research that is highly relevant to our industry and delivers added value for our clients. This is an exciting time for the asset management industry and we will watch the growing convergence of mainstream and alternative asset management with interest.” 

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