'Newcits' is a poor term. It doesn’t tell one much about what a fund does. It also imbues funds with a sheen of being new and exciting, whereas most to which the appellation is applied use recycled hedge fund strategies. EFAMA recently made this point forcefully in its Report on the Evolving Investment Strategies of UCITS.
“The so-called 'Newcits' are neither new products nor a new category of funds. 'Newcits' are UCITS that can be described as aiming actively to manage the risk-return trade-off. [...] The ‘Newcits’ label was coined by the media and should not be adopted by the industry or regulators. We do not believe that it is necessary or beneficial to have a specific label for these funds.”
However, the report doesn’t go far enough. Specifically, it elides the difference between funds relying principally on direct, long exposure to assets, and those relying heavily on contracts giving them indirect exposure to those assets whether long or short: “They [Newcits] are subject to and are managed in compliance with the UCITS framework. As such they offer the same level of investor protection as other UCITS.” This is true, but less than helpful as the risks inherent in a vehicle laden with derivatives and/or taking short positions are inherently different from those in vanilla long-only funds.
There’s also a bigger issue—disclosure requirements simply have not kept up with the array of instruments used in such funds. What one gets in a UCITS annual report is typically a laundry list of securities and derivatives held. While the line items are important, most investors will not be able to interpret them easily or at all, particularly for derivatives-heavy portfolios. A clear presentation of summary data including at least the following would go a long way to rectifying the situation:
Long, Short, Gross, and Net exposure for each relevant asset class;
Long, Short, Gross, and Net exposure for each relevant sector within the asset class;
Long, Short, Gross, and Net exposure for currencies;
Long, Short, Gross, and Net exposure for duration;
Long, Short, Gross, and Net exposure for geographic regions;
Long, Short, Gross, and Net exposure for each counterparty.
The funds in question have much to offer, but they can also be extremely complex. Unless all of us do more to provide easily understood information about their exposures and risks, investors will misuse them, and that benefits no one. A good first step would be for the regulatory authorities to require a disclosure framework that addresses the issue in a clear, consistent fashion.
This article first appeared on the FT's Adviser blog, Canary Towers.
