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investors in the form of compliance costs, which translates to higher management fees. However, Fig.8a and Fig.8b show that this is not necessarily the case. Almost 50% of UCITS managers charge a fixed fee of 1% or less, compared to only 24.4% of non-UCITS hedge fund managers. As at July 2014, the average management fee charged by UCITS hedge funds stood at 1.2%, compared to 1.6% for non-UCITS hedge funds. Moreover, a full 21.1% of UCITS funds do not charge any sort of performance fee whatsoever.


PERFORMANCE REVIEW This section of the report takes a step back to look at the bigger picture by placing the global UCITS hedge fund industry performance in comparison to other alternative investment vehicles – namely non- UCITS hedge funds, funds of hedge funds, and the benchmark MSCI (MSCI AC World IMI Index (Local)). We also break down global UCITS hedge fund performance according to geographic and strategic mandates, taking into account their annualized returns and volatilities over the last five years in the following charts and tables.


Since December 2005, the Eurekahedge UCITS Hedge Fund Index has gained 40.85%, outperforming the benchmark MSCI World Index (MSCI AC World IMI Index (Local)) and the Eurekahedge Fund of Funds Index, which were up 32.06% and 24.12% respectively. However, this pales in comparison to the Eurekahedge Hedge Fund Index ex UCITS which returned 88.90% over the same period. This discrepancy in performance could be explained by the additional restrictions placed upon UCITS funds, which regulate the degree of liquidity, level of leverage, instruments traded and diversification requirements, resulting in a depression of UCITS fund returns when compared to their less regulated hedge fund counterparts. Despite their limitations, UCITS hedge funds have made good headway and avoided any major drawdowns, occupying a valuable niche in the market for retail and other investors who may not be willing or able to access more sophisticated investments like hedge funds.


Table 1 summarizes key statistics across the four investment vehicles and shows that non-UCITS hedge funds offer the best risk/reward profile over both the three and five-year time periods – Sharpe ratios of 0.78 and 1.22 respectively. Hedge funds also exhibit less volatility and tail risk (lowest maximum drawdown), which could be attributed to their greater flexibility in hedging their exposure. UCITS funds, which have the potential to make the fund of funds structure redundant, trump the latter in terms of their five-year Sharpe ratio, but fall behind when considering a three-year horizon. In terms of annualized returns, the MSCI World Index


Fig.9 Performance of funds of funds, underlying markets and hedge funds


115 135 155 175 195


55 75 95


Eurekahedge UCITS Hedge Fund Index MSCI World Index


Eurekahedge Hedge Fund Index ex UCITS Eurekahedge Fund of Funds Index


Source: Eurekahedge


Table 1 Performance of UCITS hedge funds with other investment vehicles MSCI


EH UCITS Hedge Fund Index


July 2014 year-to-date returns 2013 returns


Three-year annualized returns Three-year annualized standard deviation Three-year Sharpe Ratio (RFR = 2%) Five-year annualized returns Five-year annualized standard deviation Five-year Sharpe Ratio (RFR = 2%) Maximum drawdown (five years)


2.41% 6.56% 3.05% 5.73% 0.18 4.48% 5.41% 0.46


-9.28% World Index


3.40% 23.80% 10.34% 11.91% 0.70


10.17% 12.24% 0.67


-18.81%


Source: Eurekahedge


EH Hedge Fund Index ex UCITS


3.03% 9.33% 5.18% 4.06% 0.78 7.33% 4.38% 1.22


-6.11%


EH Fund of Funds Index


1.73% 8.15% 2.92% 3.80% 0.24 3.48% 3.74% 0.40


-6.87%


Fig.10 Performance of geographic mandates July 2014 year-to-date returns 20% 15% 10% 5% 2013 returns


Source: Eurekahedge Three-year annualised returns


0% -5% -10%


Asia ex- Japan


Europe Global Japan Latin America


North America


41


12-05 6-06 12-06 6-07 12-07 6-08 12-08 6-09 12-09 6-10 12-10 6-11 12-11 6-12 12-12 6-13 12-13 6-14


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