Dexion Capital, a hedge fund consultant, has hit on a way of wrapping funds of funds into the European-passportable retail fund format known as UCITS III. The consultant has structured two closed-ended funds of funds as companies listed on the London Stock Exchange, which are suitable to be included in the UCITS wrapper.
The UCITS III directive, first issued two years ago, sparked a race to wrap fund derivatives for retail investors (DW, 6/20/04). But that came to an abrupt end when the Committee of European Securities Regulators cast doubt over whether hedge fund derivatives were suitable for retail investors (DW, 4/15). Last month, CESR ruled hedge fund indices could not be included in UCITS funds, but closed-ended funds, such as Dexion's companies, could be.
Ian Collier, director of Dexion in Guernsey, said it is talking to clients who are interested in its funds of funds in UCITS form. He noted, however, the diversification requirements of UCITS are strict and it would need to find other closed-ended funds with broad underlying strategies to create a UCITS structure. Dexion might consider creating other closed-ended fund companies to do this, but it would need sizeable demand, he said.
Fund-linked derivative structurers noted the cost of listing a company on the LSE is also prohibitive. One also noted the Dexion structure is unleveraged and will not produce the returns an option on a hedge fund index could pay, for example.
