Hedging strategies for investors UCITS III
Despite the problems encountered by many hedge funds in 2008, this type of asset is likely to be
of increasing attraction to private investors who are fed up with the volatility of equity markets.
However, there have been significant
barriers preventing hedge funds
becoming available to most retails clients.
Now a piece of European legislation
called UCITS* III is enabling a milder
version of hedge funds to become widely
A major attraction of hedge funds is their
ability to benefit from falling as well as
rising stock prices. In order to achieve
this they need to be able to go ‘short’ of
shares that they expect to underperform.
UCITS III does allow a fund to do this
as it provides investors with access to a
broader range of investment strategies
than traditional long-only funds, where
the manager can only buy a share or not.
In the table, we summarise some of the
main UCITS III funds which could now
appeal to UK investors looking for more
certainty and flexibility from their fund
What strategies appear
in the UCITS III format?
As a result of the various restrictions,
alternative strategies within UCITS
have so far been limited to enhanced
income, absolute return strategies as
well as the less familiar volatility and
bond hedging strategies.
Income is generated by a core portfolio
of dividend orientated shares and is
enhanced by writing covered call options
on some of the funds stock which are
sold for a premium. This provides an
Long / Short
The manager buys and hold shares (long)
in the normal manor and then sell some
stocks (short) to benefit from falls in
share prices. This strategy can be used to
neutralise market volatility or make more
What are the benefits to
The rules governing UCITS III differ from
traditional hedges and may make
them more attractive options for investors
compared to traditional hedge funds:
- Greater liquidity These funds are
available in modest amounts (as little
as £50 pcm) and they have daily,
weekly or fortnightly dealing with no
minimum holding periods.
- Better transparency As open ended
funds they are always priced on the
basis of net asset value, whereas
the closed end funds quoted on the
London Stock Exchange suffer from
sharp variations in the relationship
between their share prices and net
- Tax treatment If they have secured
'distributor status' then any profits
should be taxed as capital gain,
whereas for most hedge funds the
gains are treated as income.
- Investment restrictions Funds
using UCITS III are precluded from
investing in commodities and direct
or unlisted property.
- Gearing limitations The manager
can use derivatives to increase
exposure to the market but only
by 100% of the investment i.e. £1
invested provides £2 exposure
* Undertakings for Collective in Transferable Securities.
Funds using UCITS
** Now rated three stars by Bestinvest
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