Alternative Ucits is an investment vehicle people outside of Europe want to know more about. PerTrac’s comprehensive survey of the market reveals some surprises on location and size of the market.

Alternative Ucits funds continue to be popular with investors concerned about the issues of transparency, liquidity and risk management, concludes a report from PerTrac.

"People often ask about Ucits. It is well known in certain spaces in Europe. Outside of Europe it's really a vehicle that people want to learn more about. So we decided from an educational perspective as well as an analysis perspective, work needed to be done," explains Lisa Corvese, managing director, global business strategy at PerTrac.

The study examines a universe of 1,210 alternative Ucits providers from January 2002 to October 2011.

As expected the most popular alternative Ucits fund strategies are equity long/short (25.79%), followed by global macro (11.65%), CTA/managed futures (11.65%) and multi fixed income (10.83%).

Fixed income and long/short equity funds are the most popular strategies in terms of assets under management (AUM). Both exceed €30 billion as of October 2011, representing slightly over 40% of the industry's total AUM.

From January 2002 to October 2011, funds following an emerging markets strategy outperformed all others, returning 293.31% on an equal-weighted and 365.30% on an asset-weighted basis. However, the strategy was expected to end the year in negative territory.

Excluding nations without a significant number of alternative Ucits funds, the best cumulative return performances from January 2002 to October 2011 have come from management companies located in Luxembourg (148.61% equal-weighted return; 120.31% asset-weighted return) and the UK (116.01% equal-weighted return, 94.03% asset-weighted return).

Generally, the asset-weighted return performances of funds fared better than the equal-weighted return performance between January-October 2011. This is in line with the lower drawdown of larger funds. Based on year-to-date average returns and taking into account the rebound in markets at the end of 2011, PerTrac expects funds with a fixed income investment strategy to have finished 2011 nearly flat and all other strategies to end 2011 in negative territory.

According to the report the majority (67%) of alternative Ucits funds have a management company in the UK, Luxembourg and France. Europe as a whole accounts for 94.3% of all management company locations.

Over 50% of the alternative Ucits industry's total AUM as of October 2011 were in funds with management companies in Luxembourg (€38.99 billion) and the UK (€38.70 billion). Adding Switzerland (€20.10 billion), France (€16.78 billion) and Germany (€16.64 billion), these five countries accounted for over 87% of total industry AUM.

The average AUM of alternative Ucits funds has had significant fluctuations from January 2002 to October 2011. In January 2002 the industry's total AUM was approximately €5.40 billion. Overall AUM dropped in September 2002 to a low of around €4.52 billion. This low point was followed by a relatively steady expansionary period until the end of 2005 with three consecutive months of double-digit growth. New AUM highs were reached in July 2007 (€63.64 billion) and then again in December 2007 (€63.64 billion).

These highs were short-lived as AUM then began to decline with the industry losing about 40% of its assets from December 2007 to January 2009. It hit a low of €37.61 billion in January 2009.

Alternative Ucits were resilient, bouncing back and undergoing a rapid expansion following this down period. Industry growth averaged 5.83% a month from February 2009 until reaching a high of €178.82 billion in May 2011. However, after that date, alternative Ucits AUM contracted approximately 16%, with assets at the end of October 2011 totalling €149.94 billion.

The most rapid AUM growth was concentrated in five European countries: Luxembourg, the UK, Switzerland, France and Germany.

Despite the AUM fluctuations in alternative Ucits, asset flows remain relatively resilient. From January 2002 to October 2011, there were only 12 months of fund attrition compared with 32 months of AUM declines. This is perhaps a direct result of the framework for the funds which places emphasis on low leverage and high liquidity, concludes the report.

Luxembourg is the favoured domicile of alternative Ucits with around 49.92% of funds, followed by Ireland with 18.84% and France at 11.90%. These nations represent the country of domicile for four out of every five alternative Ucits funds.

Management companies located in the US have a slightly larger AUM than those in Ireland. The report believes total AUM of alternative Ucits funds with management companies in the US could increase as their cumulative performance returns from October 2008 to October 2011 have been 19.76% equal-weighted and 11.11% asset-weighted.

This strong performance may be rooted in the lack of a specifically stated regional investment focus, says the report, with nearly 80% of US alternative Ucits funds investing globally, allowing them to easily shift into dynamic markets.

"The turbulence of the last few years has compelled investors to seek out alternatives with greater transparency, liquidity and risk controls. Based on a robust AUM growth since 2009, it would appear that alternative Ucits funds have increasingly become a solution of choice," concludes the report.

The report used data from BarclayHedge, Eurekahedge, eVestment/HFN, Hedge Fund Research, MondoHedge, MorningstarHedge and Morningstar International. The data was merged to create a universe of around 7,000 alternative Ucits fund records at the share-class level. Using PerTrac Analytics, funds of funds, indexes, duplicate entries were removed and only the share class with the largest reported AUM was included.

If the AUM figures were not provided, PerTrac included the share class with the highest performance return and the lowest fees. This identified around 1,500 funds.

Next funds were screened to make sure they used an alternative investment strategy. The end result was a universe of 1,210 unique alternative Ucits funds that provided at least one month of performance returns since January 2002. The study reports only in the euro currency and provides details of exchange rates used.

* The Coming of Age of Alternative Ucits Funds by PerTrac, January 2012.