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By Elizabeth Pfeuti and Harriet Agnew Of FINANCIAL NEWS A founder of one of the U.K.'s largest hedge funds has warned that investors may be "disappointed" in the more heavily regulated Ucits funds, which have increased in popularity since the financial crisis. In an interview with former City Minister Lord Myners at the Fund Forum conference in Monaco this morning, Paul Marshall, co-founder of Marshall Wace, said that many of the Ucits strategies run by hedge fund managers were unrecognizable to their less-regulated offshore counterparts. Ucits are regulated funds that demand minimum levels of liquidity and diversification. The structure, which allows funds to be marketed to retail investors, has gained in popularity with hedge fund managers as a way of diversifying their client base and with investors seeking the comfort that a regulated structure can offer. Marshall said: "The Ucits structure is being used to win assets, but there is potential for people to be disappointed as what they are investing in are diluted versions of non-Ucits products." In 2007 Marshall Wace became an earlier adopter of Ucits among the hedge fund community, unveiling a Ucits-compliant market-neutral strategy based on its Tops system, which analyses broker recommendations. Since then a variety of hedge fund managers, including high profile names such as Brevan Howard Asset Management and BlueCrest Capital Management, have entered the Ucits arena, offering a number of different strategies in a Ucits wrapper. Due to the restrictions imposed upon funds by Ucits, some strategies are more easily replicated than others, which can have substantial tracking error. Bluecrest and Brevan Howard were unavailable for comment on Marshall's speech at time of going to press. Marshall said he was concerned about the range of hedge fund strategies being offered via Ucits. "There is a real rag, tag and bobtail of strategies--for example what is described as global macro is nothing like what you would expect to find in a non-Ucits fund, the only one which is comparable is the long/short strategies." Marshall Wace's Ucits fund is a long/short equity strategy, one of the strategies that fits most easily in a Ucits wrapper without having to make big changes, according to firms that structure these funds. Myners asked if there was a structural weakness in alternative fund managers using Ucits - to which Marshall replied simply "yes." Marshall added that some of the managers who had gated their funds during the financial crisis, meaning investors could not pull their money out, had moved into Ucits to entice retail investors who would be unaware of this history. Marshall Wace didn't gate its funds during the crisis and as a result it lost assets. Marshall's comments demonstrate part of a growing concern about the rise of Ucits hedge funds for both managers and investors. Speaking at the McKinsey Asset Management Conference in January, Dan Waters, a director in the asset management division at the U.K. Financial Services Authority, warned hedge fund managers keen to jump on the "Ucits III bandwagon" that there could be obstacles ahead. He warned that marketing to retail investors may be especially challenging for firms that do not have deep experience of working in the retail market, such as hedge fund managers; and reminded new Ucits managers that "compliance with the Ucits framework will take considerable investment in systems and controls." In February, Collins Stewart Fund Management, a wealth manager, echoed the FSA's warnings. Mike Brown, head of funds sales, said in a statement that the firm had a number of concerns with the rapidly expanding universe of absolute-return type products and said that the regulated nature of the structure should not preclude the need for due diligence. He said: "There will always be good and bad managers in any universe and buying an absolute return manager will far from guarantee investors positive returns. Hedge fund selection is a highly is a highly sophisticated exercise, and we believe that exactly the same applies to Absolute Return products, and that caution must be applied." Web site: www.efinancialnews.com (END) Dow Jones Newswires June 30, 2010 09:14 ET (13:14 GMT)