First-ever uk retail hedge fund will make use of ucits iii
DWS Investments is planning to launch a regulated onshore long/short UK equity fund for the retail market in the second quarter. Barring regulatory problems, this will be the first ever open-ended domestic hedge fund to be based in the UK.
The portfolio, based on an existing institutional product run by Charles Curtis, will make use of the Ucits III and mixed funds regulatory changes, which give managers greater flexibility in the use of derivatives.
DWS believes it can construct a product that has daily dealing and can price twice a month, in accordance with Ucits requirements. Paul Dellar, head of product management, said the group is confident it can go ahead after hearing the FSA"s views on derivatives within retail funds at a recent conference. Nonetheless, there are still doubts within the industry about how flexible the FSA is prepared to treat barrier-pushing products such as these.
The product will be based upon the existing UK Equilibria fund, which has been sold into the institutional market by sister group Deutsche Asset Management for over three years.
UK Equilibria is run as a low-volatility portfolio and follows a market-neutral strategy. Curtis, who also manages the DWS UK Growth fund, is in charge of stock selection but the dealing desk decides how best to short stock.
Dellar said DWS still has a number of issues to work through before it can launch the fund, however.
"The real breakthrough was establishing we can short stock," Dellar said. "Now we are looking at the detail and at that level there are things to resolve."
The two main issues surround pricing policy and how best to deal with redemptions.
Dellar said most hedge funds require 30 days notice from investors wanting to redeem money, but to comply with Ucits requirements, investors must be able to do this daily. He is confident this can be achieved without damaging the integrity of the fund.
While the institutional portfolio has a small number of large investors, conversely, the retail version would have a large number of small investors, who would have far less of an impact on the overall fund when they redeem. Dellar ruled out a limited redemption structure, as the group believes it would hamper interest. He is also confident the pricing issue is surmountable. Under Ucits, funds have to price at least twice a month.
Dellar added that hedge funds, including UK Equilibria, typically do this once a month, such is the complexity of pricing given the complex structure of some underlying investments.
DWS already runs funds with performance fees of sorts in its Opportunities fund range through a fee rebate system. Something similar could be employed on the hedge fund depending on what form performance fees will be allowed to take once the FSA"s proposals in CP185 come into force.
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