Merrill Lynch Investment Managers is preparing to launch the first long/short equity fund structured as a regulated onshore fund. The asset manager will take advantage of Europe-wide regulation, called Undertaking for Collective Investment In Transferable Securities III, which allows for a fund launched in one jurisdiction to be sold throughout the E.U.
The Financial Services Authority in the U.K. was one of the first major regulators to clarify the rules, which allow UCITS III vehicles to short securities (DW, 10/8). UCITS III has been used to wrap hedge fund indices (DW, 4/4), but this fund will be the first to make use of the new powers to short.
Tony Stenning, director in products and client strategies at MLIM in London, said the fund will launch in the next quarter. "We think we have cleared up the tax issues," said Stenning, referring to the Inland Revenue's plans to tax Qualified Investor Status funds more harshly than other authorized investment vehicles, which have put some managers off launching them (DW, 9/10).
MLIM is not alone. Several other market players, both at banks and fund managers, are looking at hedge fund strategies within UCITS III. AXA Investment Managers is considering launching a short selling UCITS III fund, but Antoine Josserand, director in structured and alternative investments at AXA in London, said it is a question of knowing whether investors' expectations of returns can be met within the constraints of the UCITS rules. One problem is UCITS funds cannot borrow. "It would be a diluted version of a normal hedge fund so it might be attractive to institutional funds looking for LIBOR plus type returns," he noted, adding the same fund might not be appropriate for the traditional high net-worth investors.
The regulatory cost of setting up a fund within UCITS III has put some players off the wrapper, however. UCITS guidelines require fund managers to show they have global cover for the securities they short sell. Baring Asset Management launched a UCITS III fund this year that short sells some government bonds and currencies. Ian Pascal, marketing director at BAM in London, said, "The FSA looks more closely at the risk management processes on this than on a traditional long-only fund." Baring may launch other funds from its UCITS III fund, but Pascal is not convinced the market conditions are suitable for a long/short equity fund.
