Blow-up warning as fund managers push boundaries

| 25/04/2011

(FT.Com): Some industry figures believe a blow-up of a Ucits III-compliant “hedge fund-lite” vehicle will take place in the next two years because managers are pushing the boundaries of existing regulation. Regulators are not able to keep pace with how managers are executing their strategies, they say. A senior executive at a US investment bank says: “I am absolutely positive that there will be a blow-up in the next two years. It’s a disaster waiting to happen.” The equity specialist, who did not want to be named, believes that European regulators are not able to keep up with the range of instruments banks are using to structure their Ucits III “Newcits” funds and are unable to understand the risks involved.

Olwyn Alexander, a partner at PwC, believes that a blow-up is most likely to come from a manager pushing the boundaries when it comes to the execution of their strategies. She says the funds that may implode are using new derivatives “not envisaged, but yet not explicitly disallowed” under the Ucits III framework.

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