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Newcits: Investing in UCITS Compliant Hedge Funds


Hugely popular due to their strong regulatory frameworks, UCITS compliant hedge funds have seen a boom in recent years and are considered by many as the only way out for the hedge fund industry after the crisis.

Newcits: Investing in UCITS Compliant Hedge Funds is a one-stop resource for investors who want to get the best out of their UCITS investments. There is a large and increasing range of UCITS compliant funds out there, but despite their tighter regulation and frameworks, investors still need to understand the risks they are undertaking, the structures of the funds and their differences and similarities to mutual funds and hedge funds.

The book begins with an assessment of the financial crisis from the perspective of hedge funds and funds of hedge funds. Then it introduces the UCITS framework and shows how these strategies present a valuable and attractive alternative to offshore hedge funds and funds of hedge funds. The regulatory framework is described in depth, as are the different business models used by asset managers. Finally it looks at current hedge fund strategies such as long/short equity or global macro, and at how these can be integrated into the framework.

The book also describes in detail the Newcits industry, discussing the performances, the fee structure, the liquidity and the key theme of "replicability", studying the tracking error volatility of the Newcits funds in comparison with their offshore versions. A discussion of the effectiveness of the regulation and its potential developments concludes the book.

FILIPPO STEFANINI has served as Head of Research in Eurizon AI SGR SpA since August 2008. He is responsible for analyzing, selecting and monitoring hedge funds and Newcits funds. Eurizon AI SGR SpA is the asset management company of the banking group Intesa San Paolo specialized in managing funds of hedge funds. Since 2007, he has held a position as lecturer of Risk Management at the Engineering Faculty of the University of Bergamo. He has contributed to Frank J. Fabozzi's The Handbook of Finance published in 2008 by John Wiley & Sons Inc., and the author of Investment Strategies of Hedge Funds published in 2006 by John Wiley & Sons Ltd.

TOMMASO DEROSSI, Management Engineer, graduated with honours from the University of Bergamo. He worked as research assistant at the Italian Stock Exchange, Department of Economic Research, where he managed market statistics about tender offers, IPOs and equity offerings. He cooperated with Universoft as Corporate Finance analyst, participating in the valuation process of many Italian companies operating in the IT sector and supporting research about Corporate Governance issues in European listed companies. He is currently employed in the ICT division at Lombardini Holding, an Italian retailer, and is responsible for ICT projects concerning the finance & administration area.

MICHELE MEOLI (PhD) is an Assistant Professor of Corporate Finance at the University of Bergamo, Department of Economics and Technology Management. He has been Marie Curie Research Fellow at the Centre for Econometrics Analysis, Cass Business School of the City University of London. He has authored articles in a number of international journals, covering several research areas, such as corporate finance, corporate governance and financial econometrics. Since 2007, he has lectured Principles of Finance, Business Valuation, and Business Economics at the University of Bergamo.

SILVIO VISMARA (PhD) is an Associate Professor of Corporate Finance at the Department of Economics and Technology Management of the University of Bergamo. He has been research fellow at the Manchester Business School and has been visiting at the University of La Laguna, at the Cass Business School, and at the University of Florida. He has participated in numerous applied research projects, promoted by the Italian Ministry of Research, and other private and public institutions. He is author of articles in international journals such as Entrepreneurship Theory and Practice, Journal of International Financial Management and Accounting, Journal of Technology Transfer, International Journal of Entrepreneurship and Innovation, Managerial Finance, and Annals of Finance. He is scientific consultant for the Italian Stock Exchange and founder of Universoft, a spin-off from the University of Bergamo.

Preface by Massimo Mazzini.

Introduction: The Crisis of 2008 and theWay Out.

1 From UCITS Directive to UCITS III Provisions.

1.1 Product Directive.

1.2 Management Company Directive.

1.2.1 Simplified Prospectus.

1.3 Additional Regulatory Limits Imposed by UCITS III.

1.3.1 The Prohibition on Borrowing and Short Selling.

1.3.2 Prohibition on Investment in Commodities.

1.4 The Next Step: UCITS IV Directive and New Provisions by EU.

1.5 Simplification of the Notification Procedure.

1.6 Replacement of the Simplified Prospectus with the Key Investor Document.

1.7 Management Company Passport.

1.8 Master–Feeder Structures.

1.9 Mergers between UCITS.

1.10 New EU Directive on Alternative Investments.

2 Business Models for the Production of Newcits and Managed Accounts.

3 Analysis of Operational Model of UCITS III Products.

3.1 Luxembourg SICAVS.

3.1.1 Harmonized and Non-Harmonized UCITS.

3.1.2 Self-Managed and Hetero-Managed SICAV.

3.2 CSSF 07/308 Circular: Guidelines for Luxembourg UCITS.

3.2.1 Structure of the Risk Management Unit.

3.2.2 Activities of the Risk Management Unit.

3.2.3 Determination of the Global Exposure for Non-Sophisticated UCITS.

3.2.4 Determination of the Global Exposure for Sophisticated UCITS.

3.2.5 The Counterparty Risk.

3.2.6 Limits of Concentration risk.

3.3 Swing Pricing.

3.3.1 The Swing Factor.

3.3.2 Pros and Cons of Swing Pricing.

3.3.3 Pros and Cons of Full and Partial Swing.

3.3.4 Operational Implications.

3.4 Depositary Bank, Administrator and Lack of Prime Broker.

3.4.1 The Role of the Administrator.

3.4.2 The Lack of Prime Broker.

4 Hedge Funds Investment Strategies and Limits Set by UCITS III.

4.1 Long/Short Equity.

4.1.1 Equity Market Neutral.

4.2 Relative Value.

4.2.1 Convertible Bond Arbitrage.

4.2.2 Fixed Income Arbitrage.

4.2.3 Mortgage-Backed Securities Arbitrage.

4.3 Directional Trading.

4.3.1 Global Macro.

4.3.2 Managed Futures (CTA or Systematic Futures Trading).

4.4 Event-Driven (or Special Situation).

4.4.1 Merger Arbitrage.

4.4.2 Distressed Securities.

4.5 Other Strategies.

4.5.1 Statistical Arbitrage.

4.5.2 Index Arbitrage.

4.5.3 Volatility Arbitrage.

4.5.4 Multi-Strategy.

4.6 Limits Imposed by UCITS III.

4.6.1 Considerations.

4.6.2 Background.

4.6.3 Characteristics of the UCITS III Funds Appreciated by Investors.

4.6.4 Main UCITS Rules.

4.6.5 Additional Rules to Consider.

4.6.6 Collateral Management Guidelines.

4.7 “Synthetic” Short Selling and Contracts for Difference.

4.8 Synthetic Newcits.

5 The Early Stages of the Newcits Industry.

5.1 Description of Sample.

5.2 Implemented Strategies.

5.3 Fee Structure.

5.4 Performance Analysis.

5.5 Tracking Error and Tracking Error Volatility.

5.6 Multivariate Regression Analysis on Panel Data.

5.7 Exposure to Risk Factors for each Strategy.

5.8 Contribution by Factor to the Historical Returns.

5.9 Liquidity Comparison.

5.10 Performance Contribution Analysis at Industry Level.