Dissatisfaction with UCITS hedge funds among European investors has increased sharply amid the market volatility caused by the COVID-19 pandemic, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

At the end of October 2020, the assets of UCITS hedge funds domiciled in Europe stood at €277 billion (US$337 billion), 18.7% down on the December 2019 total of €341 billion, notes Cerulli Associates.

“UCITS hedge funds have been losing favor for some time, but the coronavirus pandemic has accelerated the trend,” says Fabrizio Zumbo, associate director, European asset management research at Cerulli.

Even though, on average, liquid alternatives performed better than mainstream funds during March’s market sell-off, UCITS hedge funds delivered a weaker-than-expected performance. The HFRI-I Liquid Alternative UCITS Index returned approximately -2% for the year to end-September and -5.6% during March.

According to several of the asset managers that Cerulli interviewed in Europe, investors in the region believe UCITS hedge funds did not provide the protection and the diversification they were supposed to offer investors’ portfolios. “The vehicles failed to gather the uncorrelated returns or add the significant level of diversification that European investors had sought during a period of sustained market volatility,” says Zumbo.

Although the outlook for UCITS hedge funds remains negative for 2020, institutional investors' interest in integrating responsible investment practices into hedge funds is growing—a development that may provide fresh opportunities for alternative managers. Some 64% of the institutional investors surveyed by Cerulli in Europe believe it is currently somewhat important to integrate responsible investment practices into hedge funds and 52% expect it to be very important in two years’ time.

“Managers seeking to raise European institutional assets from their UCITS hedge fund platforms will need to focus more on incorporating environmental, social, and governance factors into their UCITS hedge fund vehicles,” says Zumbo.

Other Findings:

• Passively managed assets in Europe registered another positive month, gathering €7.9 billion of net inflows during October, 25.8% less than September's tally. Year to date (YTD), passively managed funds have recorded net sales of €91.8 billion, in marked contrast to actively managed assets, which have registered outflows of €42.5 billion YTD. Exchange-traded funds in Europe attracted €4.3 billion in net sales in October.

• Equity funds had another positive month, recording net inflows of €7.0 billion in October to take YTD net sales to €9.5 billion. Thematic funds covering areas such as sustainability, the environment, and technology were especially popular. European equity funds are suffering, having posted net outflows of €10.8 billion YTD. This may be due to investors' confidence being shaken by the second wave of COVID-19 cases in Europe and the related regional lockdowns.

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¹Broadridge Data