UCITS Funds vs. Actively Managed Certificates (AMCs): A Pragmatic Comparison

Disclaimer: The views and opinions expressed in this article are solely my own and do not necessarily reflect the official policy or position of my employer.

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When considering investment structures, both UCITS funds and Actively Managed Certificates (AMCs) offer unique benefits and drawbacks. UCITS funds are highly regulated investment products designed to be sold to the retail market in the European Union. On the other hand, AMCs are structured products that reflect the performance of a portfolio without offering direct ownership of the underlying assets. Let's compare these two on various parameters to assess their suitability for investors.

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1.????? Complexity

- UCITS Funds: They have a high regulatory standard to ensure investor protection, which can lead to complex management and compliance processes. However, this complexity is paired with a robust regulatory framework that underpins investor confidence and a global market acceptance by almost all regulators worldwide.

- AMCs: These are generally less complex than UCITS funds. As they replicate the performance of a portfolio, they are easier to set up and may not require the same level of ongoing management. However, the simplicity for the issuer can translate into complexity for the investor who must understand the nuances of the structured product and does not benefit from the highest regulatory and protection standards that are inherent to UCITS.

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2.????? Pricing

- UCITS Funds: Pricing can be higher due to the stringent regulatory, compliance, and reporting requirements. The costs of running a UCITS fund are typically borne by the investors through management fees and admin charges.

- AMCs: They often have lower setup and operating costs compared to UCITS, making them potentially more cost-effective for investors. However, investors need to be wary of the costs embedded within the AMC structure and the potential lack of full transparency in pricing.

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3.????? Time to Market

- UCITS Funds: The time to market can be lengthy due to the need for regulatory approval from the relevant EU authorities. This process ensures compliance but can delay launch.

- AMCs: AMCs can typically be brought to market faster as they do not have the same regulatory hurdles as UCITS funds. This speed can be advantageous when trying to capitalize on timely market opportunities.

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4.????? Costs

- UCITS Funds: In addition to higher setup costs, UCITS funds often incur substantial ongoing costs related to compliance, auditing, and reporting.

- AMCs: The ongoing costs of AMCs can be lower, as they do not require the same level of regulatory oversight. However, they may incur other costs related to the structuring and distribution that are less transparent.

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5.????? Regulation

- UCITS Funds: UCITS are highly regulated, offering a high level of investor protection. This regulation can be seen as both a pro and a con — a pro because it enhances investor trust and a con because it adds to the complexity and cost.?

- AMCs: They are typically subject to less stringent regulation, which can limit investor protection. While this may reduce costs, it can also increase the risk for investors.

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6.????? Distribution

- UCITS Funds: The "passporting" rights within the EU allow UCITS funds to be sold across member states without the need for additional registration, facilitating broad distribution. UCITS are also recognized and accepted for a fast-track distribution registration procedure in numerous markets outside the EU, such as Singapore, Switzerland etc.

- AMCs: AMCs may face restrictions in distribution, especially within the EU, as they might not be eligible for passporting and may not meet the regulatory criteria in certain jurisdictions. This translates in a potential loss of investor groups and hence AuM restrictions.

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7.????? Eligibility for Institutional and Retail Investors

- UCITS Funds: Designed for retail distribution in the EU, UCITS are also extremely popular with institutional investors due to their high regulatory standards.

- AMCs: They are often structured for institutional or sophisticated investors and may not be suitable or available for the retail market, particularly in the EU and less popular with some institutional investor groups.

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8.????? EU vs. Non-EU Investor Preferences

- EU Investors: They generally prefer UCITS funds due to their strong regulatory framework, consumer protection, and ease of understanding. UCITS funds are also more widely distributed and recognized in the EU.

- Non-EU Investors: These investors may be more open to AMCs, especially if they seek tailored investment solutions or if the local regulations are less restrictive (typical example would be Switzerland). However, the recognition and prestige of UCITS can also appeal to non-EU investors, especially in jurisdictions that value the EU's regulatory standards.

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Conclusion

The choice between a UCITS fund and an AMC depends on various factors, including the target investor base, regulatory appetite, time to market, and cost considerations. UCITS funds offer a high level of investor protection and are favored for their wide distribution within the EU, making them suitable for both retail and institutional investors. AMCs, meanwhile, offer quicker time to market and potentially lower costs, which can be attractive for certain strategies and investor segments. Ultimately, the decision will hinge on the specific needs and goals of both the investors and the fund managers, as well as the regulatory environment in which they operate.