Investors turn to structured funds

May 28, 2010

Funds are growing in popularity across the globe as investors who are still wary following the financial crisis look for transparent and liquid investment vehicles. The increase in fund investments was verified for the UK market this month by data from Barclays’ stockbrokers. Recent months have seen renewed investor confidence in funds and April saw the highest funds trading on record.

Structured funds were popular in 2005 and 2006, when providers were repackaging funds of funds into leveraged products, using their own balance sheets to boost the initial investment. However, liquidity problems and concerns about the future of hedge funds led banks to pull out of this space during 2008. But interest in structured funds is growing again, and some of the large structured products providers are moving back into that business.

Added to that, the exchange-traded fund (ETF) market is growing rapidly. The market in Europe has risen at an annual rate of 90% over the past decade, while the global market has grown at 56% per year, with predictions from Blackrock of continued growth in the European market of 30% per year over the next few years.

But structuring and selling funds has its difficulties, which could limit the growth of the industry. The regulations imposed on funds in the European market make them an attractive proposition, adding a layer of security to the investments, but it makes them more difficult to package.

The European Union’s Undertakings for Collective Investments in Transferable Securities (Ucits) III directive is one of these sets of regulations. Creating a Ucits-compliant fund is more complex than issuing a note-based investment. It is more costly, but that is the price for more security, consider experts in ETFs in Paris. When you are well organised you need (at least) two months to list an ETF.

The different regulatory authorities, currencies and exchanges in Europe, also add complications to issuing and distributing funds. This can make it difficult for new and smaller players to enter the market. And the same issues apply to some extent in Asia and Latin America, where there are different currencies and regulations across the continents.

New regulations in the UK and Europe might help fund providers to overcome these hurdles and push the growth of funds further and, as traditional structured product providers enter the fund space, will this be to the detriment of the note industry?