Do Alternative UCITS Deliver What They Promise? A Comparison of Alternative UCITS and Hedge Funds

UCITS funds are mutual funds that are regulated by pan-European guidelines and can easily be distributed throughout Europe. We study the empirical performance of a survivorship bias-free sample of alternative UCITS funds. Most importantly, as alternative UCITS funds are often marketed as regulated hedge funds, we compare them with offshore hedge funds. Our results show that alternative UCITS offer similar raw returns but lower standard deviations during the full sample period. However, single-index models show that alternative UCITS funds provide only marginal exposure to variation in hedge fund returns. Multifactor models indicate that the most important risk factors for both alternative UCITS funds and matched hedge funds strategies are related to stock market risks. However, alternative UCITS funds exhibit a significantly lower exposure to these factors than hedge funds. Furthermore, they load on different risk factors, suggesting that alternative UCITS and hedge funds follow different strategies. We test more formally whether alternative mutual funds and hedge funds constitute different asset classes. In particular, we assess the degree of the value added for an investor in terms of enhanced diversification benefits by implementing a spanning test and find that both groups are different asset classes with time-varying diversification properties