A comparative analysis of the performance of AIFs and UCITS funds

Abstract

This dissertation aims at assessing the performance of Alternative Investment Funds (AIFs), and Undertakings for Collective Investment in Transferable Securities Funds (UCITS). The two fund structures under investigation, AIFs and UCITS, are governed by different regulatory regimes, hence are required to operate within different parameters. This study seeks to identify whether the parameters established by the regulations impact the performance of the respective funds. Consequently, various performance measurements are estimated and analysed in order to determine which of the two fund structures has performed better during the period under study. The performance measurement was carried out by adopting various methodologies, such as Treynor’s (1965), Jensen’s (1967) and Sharpe’s (1966). The outcomes of each model were then analysed, and comparisons were drawn. The three methodologies were applied for the entire period under investigation, as well as for the individual years being analysed. All tests applied gave similar outcomes, both when looking at the full period, as well as when assessing the data on an annual basis. The results all converged in confirming that the performance of UCITS funds was better than that of AIFs in the period under investigation. Upon further investigation, it emerged that the period being studied was an abnormal one, containing the aftermath of the global financial crisis which commenced in 2007. This period consisted of high volatility, particularly the initial years of the period analysed, as shown by the inferior performance witnessed in these years. The volatility characterising the period studied could be a potential factor affecting the results of this study. Given the riskier nature of AIFs, they are more susceptible to risks than UCITS funds. On the other hand, the latter are likely to have a better buffer against risk because of the more restricted regulatory parameters under which they are allowed to operate. The outcome of this study suggests that taking additional risk is not always likely to result in better returns for the investors. This is especially true in periods characterised by high levels of uncertainty, such as the one included in this study. In effect, the findings of this study suggest that investors would be better off allocating their monies in lower risk, or even risk-free assets during periods of high turbulence.