The 437 respondents report assets under management (AUM) of more than €13 trillion. Investment fund managers account for roughly €7 trillion of these assets.

In general, the survey suggests that institutional investors bound by quantitative restrictions will ask fund managers and distributors to repackage hedge fund strategies as UCITS. For their part, managers of alternative funds are concerned by the uncertainties surrounding the directive on alternative investment fund managers (AIFMs) and may consider packaging their strategies as UCITS.

Most respondents, however, fear that structuring hedge fund strategies as UCITS will distort strategies and diminish returns. Many strategies, after all, would need to be altered to earn the UCITS label, and liquidity requirements would put the liquidity risk premium out of reach. In addition, hedge-fund UCITS pose operational problems that, as our survey suggests, the industry is insufficiently aware of.

In sum, the use of UCITS to distribute hedge funds is the perverse outcome of a messy set of regulations; so EDHEC suggests improved regulation of investment funds and properly designed incentives: incentives to invest in illiquid assets could be designed in regulated closed funds with a fixed horizon; incentives to adopt the AIFM directive must be given by modifying the regulation of European institutional investors and authorising them to invest directly in funds that comply with the AIFM directive; incentives to manage rather than to insure non-financial risks must be given by defining the responsibilities of distributors, asset managers, depositaries, and valuators and requiring them to hold the adequate regulatory capital.

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