How to differentiate offshore and onshore products

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The growing interest in alternative Undertakings for Collective Investment in Transferable Securities (UCITS) funds among European investors is an opportunity for offshore managers, but offering the same strategy as two different products presents its own challenges, especially with regard to fees, according to the latest issue of The Cerulli Edge.

Demand for UCITS products and the introduction of the Alternative Investment Fund Managers Directive (AIFMD) has left many fund managers, who are keen to access a global investor base, unsure of whether to retain their offshore strategies, move them onshore, or do both, says Cerulli, a global analytics firm.

Seeking to resolve the offshore dilemma by adding an onshore product can create its own set of challenges, especially when launching UCITS funds designed to replicate the performance of an offshore strategy, says Barbara Wall, Europe managing director at Cerulli.

“Offering a UCITS product alongside a separate, offshore version of the same strategy can be problematic,” Wall says. “The framework’s restrictions on strategy and liquidity (UCITS funds must trade at least twice a month) give rise to the potential for onshore/offshore pairings that could favor one set of investors over the other. This makes the dynamic of the said pairing paramount to a successful distribution strategy.”

A key distinction needs to be made: has the UCITS fund been designed to run pari passu to the offshore original or to complement it? Managers marketing the UCITS hedge fund as pari passu should expect fees to come under greater scrutiny, Cerulli says.

“Investors in the offshore fund, with less generous terms than the UCITS-compliant variant, may feel they are getting a raw deal if they are paying more or the same as investors in the onshore vehicle for less liquidity, especially if the difference in performance is minimal,” adds Tony Griffiths, a senior analyst at Cerulli.

“As such, tweaking the strategy within the offshore fund in order to change the risk-reward profile, thus distinguishing it from its UCITS counterpart, will help head off awkward questions and mitigate the chances of cannibalizing the investor base. If the manager is not marketing the funds aspari passu and has made clear that the UCITS strategy is a ‘lower strength’ version of the offshore original, a lower UCITS fee is then more applicable,” says Griffiths.

This article originally appeared in Funds Society