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$205.7 billion by 2010. The population of funds also grew by almost 500 during that period (see Fig.1).


The Eurozone crisis in 2011 brought a temporary halt to this growth trend, with assets retreating slightly to $200.4 billion, remaining largely unchanged during 2012 as well. Since then, the strong rally in global equities in the past couple of years and signs of economic recovery in the US have reignited investor interest in the markets, resulting in a corresponding flow of capital to UCITS hedge funds which witnessed AUM soaring to $275.2 billion by July 2014.


Fig.2 shows the growth in the AUM of UCITS hedge funds relative to the broader global non- UCITS hedge fund industry since January 2008. Both investment vehicles saw a sharp fall in their AUM in the aftermath of the global financial crisis, bottoming out in August to September 2008. However, that is where the similarities end. UCITS funds saw a steep rise in popularity post the financial crisis, growing to over 2.5 times their original AUM by July 2011. European institutional investors’ need for regulated products as opposed to simply going for performance played a role in increasing the inflow into UCITS products. After a retreat and stagnation in 2012, the AUM of the industry resumed its upward march on the back of strong performance-based gains and net asset inflows in 2013. As of the date of writing, the size of the UCITS fund industry has expanded 186.6%, while non-UCITS hedge funds have only gained 5.0%.


It is pertinent to note here that UCITS hedge funds started out with a smaller base AUM, which renders their month-on-month growth figures more pronounced than those for the broader hedge fund industry. Nonetheless, the strong gravitation of investors towards UCITS-compliant vehicles is undeniable.


INDUSTRY COMPOSITION and GROWTH TRENDS Launches and closures Fig.3 gives a clear profile of the growth and attrition rate of the industry over the last five years on a quarterly basis. The UCITS sector witnessed a strong period of launch activity in the period immediately following the collapse of Lehman Brothers, and the rise in popularity of regulated investment vehicles, which were seen as a solution to the excessive risk- taking by hedge funds which was blamed for the major losses during the crisis. This encouraged a number of existing fund houses to launch UCITS- compliant funds to tap into the European retail and institutional investor market.


The attrition rate picked up from 2011 to 2012 due to the trends over the last three to four years. Starting in 2011, the onset of the Eurozone


crisis dampened investor sentiment and hurt returns, leading to a decline in total assets. Also, most of the investor allocations in the industry have increasingly gone to the larger and more well-established hedge funds. Due to the lack of asset flows as well as the inability to generate performance fees in 2011 and 2012, a number of the smaller hedge funds closed shop in 2012 as it became unsustainable to run their operations on admin fees from a small asset base. The rate of closures peaked in 2013 and has remained generally high since. Rather than a decline in the popularity of UCITS funds, the truth is more likely to be reality catching up to UCITS funds after the surge in population during 2009 to 2010. With a sufficiently long track record, poor performers are starting to be weeded out. The supply of new entrants to the


industry, while significantly lower than the previous years, has managed to keep ahead of closures, resulting in a growing UCITS population.


Head office locations The breakdown of the industry according to head office location shows that most UCITS funds chose to establish their base in Europe. Funds based in the United States, the most popular choice for non-UCITS hedge funds, constitutes only 10% of the population of UCITS funds (see Fig.4b). As UCITS is a European regulation, it perhaps comes as no surprise that the majority of UCITS-compliant hedge funds fall within EU jurisdiction (see Fig.4a). The United Kingdom, as the largest financial centre in Europe, is home to the largest number of UCITS hedge funds at 38%, whereas Luxembourg takes


Fig.4a and 4b Head office locations by number of funds UCITS UK 38%


Luxembourg 15% US 10% France 10% Switzerland 8% Ireland 4% Germany 3% Sweden 3% Malta 1% Others 8%


Source: Eurekahedge


NON-UCITS HEDGE FUNDS UK 21%


Luxembourg 4% US 41% France 3%


Switzerland 6% Hong Kong 4% Brazil 3%


Singapore 2% Australia 2% Others 14%


Fig.5a and 5b Fund domiciles by number of funds UCITS


Others 0.9%


Italy 0.2%


Germany 0.4%


Spain 0.3%


Austria 0.3%


Liechtenstein 0.3%


UK 3.1%


France 6.2%


Ireland 37.2%


Cayman


Islands 37.1%


Others 10.6%


Luxembourg Ireland 3.6% 2.4%


Luxembourg 50.9%


NON-UCITS HEDGE FUNDS US 32.8%


British Virgin Islands 5.5%


Source: Eurekahedge


Bermuda 2.7%


Brazil 2.4%


Canada 1.7%


Australia 1.2%


39


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