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Paulson & Co, High returns and UCITS

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It´s been in the news that Paulson & Co has launched a UCITS III fund eligible for distribution to retail customers in European Economic Area. Due to regulatory issues, retail investors usually have no access to high return (i.e. presumably complex and risky) investment vehicles. Instead retail investors are targets for banks and other promoters who sell them all kinds of regulated funds. Those funds are typically poor performers and the management is more concerned how to gather and keep as much as possible assets rather than how to generate decent return. Just list through their fund marketing brochures and you´re likely to find a lot of low single digit or negative returns. Occasional 10+% return is usually for single sector or country funds and due to cyclical upswing in the underlying asset values rather than alpha return generated by the managers.

Paulson & Co managed fund is something different from a typical retail fund, there is top-notch, performance-driven management in place, but the strategies are unlikely even remotely to be adapted to fit UCITS requirements. Last year we´ve been asked by a customer to evaluate a feasibility of launching UCITS-compliant hedge fund. The conclusion was that, generally, hedge funds do no qualify for UCITS recognition. UCITS regulation is too restrictive to the point that would render most of the hedge fund strategies irrelevant. Borrowing restrictions (max 100% of fund´s assets), asset class restrictions (no real estate, commodities, precious metals …) etc. are aimed to fool-proof the operation. Therefore, it catched my interest how they could fit the fund under UCITS regulations and how the fund strategy would differ from the original strategy.

So, how they have done it? The fund is launched as a sub-fund of DB Platinum IV fund. There are 47 sub-funds in DB Platinum IV fund, the Prospectus spans 476 pages, of those 34 devoted specifically to DB Platinum IV Paulson Global. The small print advises that the investors should be prepared and able to sustain losses up to a total loss. The fund´s underlying asset is synthetic managed basket. The fund is a fine piece of financial engineering. The basket is a virtual portfolio, as the Prospectus states, the allocation of the investment will be made solely on a virtual basis in the records of the Basket Administrator.

The way Paulson & Co has launched UCITS fund is not a suitable way for the most of hedge funds. The fund holds notional basket of investments. To keep it notional the fund requires a lot of fiddling with swap and similar contracts with no other purpose than to keep the fund UCITS compliant.

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Written by A.S.

February 10, 2011 at 3:36 pm

Posted in investment

Tagged with ,

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