Dubai: Historically hedge funds investments have been made through offshore fund structures, however the last few years have seen the rise of onshore vehicles in a regulatory effort across the globe to better address investors’ concerns of liquidity and transparency.

In Europe, the undertakings for collective investment in transferable securities (UCITS) directive have evolved into one of the most widely recognised regulatory frameworks of investment funds allowing investors to access hedge fund strategies through UCITS compliant onshore structures.

UCITS has been developed over the last couple of decades in order to enhance investor protection within the investment fund markets. The main focus of the directive was on providing a clear definition of allowed instruments, level of liquidity, diversification and transparency. When the framework first came to fruition in 1985, the main target were traditional funds, which meant that derivatives, for example, could only be used in a limited.

As global markets evolved and products became more complex, the UCITS directive has been enhanced steadily. The latest set of rules, UCITS IV, which came into effect in 2011, has a much broader investment scope allowing a wider range of instruments and also knows much less restrictions regarding the use of derivatives. This has opened the UCITS framework for the creation of new funds that follow less restricted strategies, so-called alternative UCITS strategies, which are the focus of this paper and allow the implementation of hedge fund strategies.

A Deutsche Bank study released earlier this month showed that the percentage of participating investors allocating to liquid alternatives had jumped from 28 per cent to 51 per cent year on year.

Some three-quarters of alternative UCITS investors and nearly two-thirds of investors into alternative ‘40 Act mutual funds planned to increase their allocations.

The study surveyed 212 investor entities worldwide, managing more than $804 billion in hedge fund assets, and 86 global hedge fund managers representing $6 trillion in firm-wide assets.

According to Deutsche Bank, alternative mutual funds have grown by 38 per cent annually since 2008, compared with 13 per cent for the hedge fund industry and 9 per cent for the U.S. mutual fund industry. The study predicted that net inflows into liquid alternatives from survey participants would grow by 44 per cent over the next 12 months — that is, new inflows of $49 billion, compared with $34 billion over the last 12 months.

Hedge fund managers are quick to diversify their product offering in response to investor demand, with 42 per cent of responding managers currently offering liquid alternative products, up from 27 per cent last year, and a further 34 per cent likely to consider including such products.

Twenty-nine per cent of respondents planned to launch at least one alternative ’40 Act mutual fund, and 25 per cent of managers have similar plans for alternative UCITS products.