Ucits hedge fund platforms like those offered by Bank of America Merrill Lynch, Deutsche Bank and Northern Trust are beginning to attract substantial institutional investor interest.

Setting up a Ucits fund involves a considerable amount of work. For some managers the effort and expense required may just be too great. For those based outside the EU the requirement to have a European management company can be a real obstacle.

But some companies are offering a helping hand by setting up platforms to host these funds. Admittedly the move is hardly based on generosity – the platform hosts take a portion of the fees. Nevertheless, many managers think it is worth the cost.

Perhaps the most successful Ucits hedge fund platform set-up to date is that run by Merrill Lynch Investment Solutions (MLIS), part of Bank of America Merrill Lynch. MLIS has attracted a number of big-name managers to the platform including GLG Partners, York Capital and Marshall Wace. The platform now has total assets under management (AUM) of $1.6 billion.

Meanwhile, Deutsche Bank’s DB Platinum platform has also snared some well-known hedge fund managers, most recently Winton Capital Management. In total the bank’s platform now has almost $13 billion in AUM focused on systematic trading. In alternative investments Deutsche Bank’s platform has around $1.8 billion in funds and exchange traded funds.

More recently Northern Trust unveiled an Irish common contractual fund (CCF) platform for Ucits funds. This platform tar- gets a variety of strategies. Northern Trust plans to aim the platform principally at non-European managers.

A few smaller management companies and private banks have also ventured into the platforms realm. Schroders’ fund of hedge fund (FoHF) subsidiary NewFinance Capital launched a Ucits platform in October 2009 and now has two managers on it.

In December 2009 structured product boutiques Luxembourg Financial Group (LFG) and Ganymede Partners teamed up for a platform launch, while investment advisory company Merchant Capital unveiled its platform.

MLIS’s head of European marketing Riccardo Fisogni describes the bank’s platform as a “one-stop shop” for both investors and managers.

Value for money
Ucits platforms provide the same benefits as a single-manager fund in terms of transparency, liquidity and regulation. Platform providers think they can also add benefits to make the fee they charge for distribution worthwhile.

Platforms come ready-equipped with independent service providers, operational investment and access to a wide group of clients to which the fund managers themselves might not always have access. Fisogni says the inbuilt risk controls are key.

“They don’t need to allocate time and resources to redo the due diligence on the platform, they just need to focus on the new fund managers available,” says Fisogni of investors.

He explains that investors who are new to a platform only need to do their due diligence once on the platform itself rather than on the individual managers. After that they should be confident that any managers added to the platform will have been selected with the same care.

Managers, adds Fisogni, should have the same confidence if they are considering adding another fund to a platform on which they are already hosted.

The other key plank, particularly for a Ucits fund, is distribution. At present an independently managed Ucits fund must seek authorisation to market itself in each European member state individually, although this process will be simplified under Ucits IV.

Funds hosted on a platform will be marketed and distributed by that platform. Companies such as BAML or Deutsche Bank have the advantage of a recognised name and a reach into a potential new investor base. They are able to tap into existing distribution and marketing networks as well as leverage their brand to attract new investors.

Northern Trust’s head of pooling Aaron Overy says investor demand and the passporting aspects were important reasons for the bank’s decision to launch its CCF.

Diversification of clients and business is another draw of a Ucits platform. Although platforms featuring hedge fund managers are rarely marketed directly to retail clients, they are often marketed to institutional clients such as pension funds that might previously have had a limit on exposure to hedge funds or alternatives in general.

Fisogni says the MLIS investor base is “very diversified” and includes pension funds, insurance companies and asset management businesses.

He believes a platform offering will become an important part of any investment bank’s business in future.

“The advantage for us is to offer an innovative product to our clients and in doing so to affirm our leadership in the market,” Fisogni says.

Capital raising in Ucits funds has been hard for many single managers. In contrast, funds on platforms appear to be doing a little better. While many Ucits funds have struggled to find capital, the MLIS BlueTrend Ucits Fund, run by BlueCrest Capital Management, closed at $642 million in April 2010 due to capacity constraints after less than 18 months on the platform.

MLIS is targeting a “massive growth” in AUM over the rest of 2010 and plans to add another four managers to the platform in asset classes not currently covered.

However, Fisogni and Overy are both careful to note they want strategies that fit neatly into the Ucits regulations to build their platforms.

Platforms are now popular enough with managers and investors that the organisations running them need to do less promotion. Overy reports receiving enquiries from managers even before the official launch of Northern Trust’s CCF.

Fisogni says when MLIS saw the start of the rush into Ucits by hedge fund managers, the bank established a marketing strategy and approached the managers. This has since switched. “Now we’re approached by smaller and larger hedge fund houses asking us to let them manage a new sub-fund on our platform,” he reveals.

The number of single-manager Ucits funds far outweighs the number of funds run on the small number of platforms. However, the distribution capabilities offered by the platform providers is a price that increasing numbers of funds may be happy to pay, particularly if the asset-raising environment continues to be tough.