Fashionable new hedge funds may not make money

(Reuters): Investors in a fashionable new breed of EU-regulated hedge fund portfolios could end up being frustrated by hidden costs and restricted strategies that mean returns fall short of those delivered by unregulated peers. Clients have flocked to UCITS-compliant hedge funds, or ‘Newcits’, amid predictions they will steal market share from offshore rivals still recovering from a financial crisis slump which has left them looking a poor bet. Assets in Newcits have doubled to $90 billion in the last year and growth is accelerating, while assets in funds of hedge funds have stalled at around $500 billion after falling by almost a third during the financial crisis.

Regulated funds have strict liquidity requirements, leverage limits and clear asset prices. That makes them attractive to retail investors seeking a cheap and supposedly safe entry point into hedge funds, but restricts diversification and squeezes returns, specialists said. "They’re not going to blow up, they’re just not going to make any money," said Richard Travia of $1.1 billion invest management firm Tradex, which manages a fund of funds.

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