UCITS vs. AIFs: what are the differences?

In the investment universe, UCITS (Undertakings for Collective Investment in Transferable Securities) and AIFs (Alternative Investment Funds) constitute two major categories of funds, offering savers and allocators the possibility to diversify their assets across different asset classes.

What are the main differences between these two types of funds?

1. Definition and Regulatory Framework

UCITS: Regulated and Standardized Funds

UCITS are collective investment funds that comply with the European UCITS directive (Undertakings for Collective Investment in Transferable Securities). They are subject to strict rules regarding risk diversification, liquidity, and transparency, making them particularly suitable for retail investors.

They generally invest in listed stocks, money market instruments, or sovereign and corporate bonds, ensuring high liquidity and daily valuation.

AIFs: A More Flexible Alternative

AIFs encompass all collective investment funds that do not comply with the UCITS directive. The category was defined by the European AIFM directive (Alternative Investment Fund Managers Directive) and transposed into national law.

Unlike UCITS, AIFs are not limited to stocks, money market instruments, and bonds. They can invest in unlisted shares (private equity), real estate, infrastructure, artwork, commodities, forests, etc. Their regulatory framework is more flexible, allowing them to adopt more complex investment strategies.

2. Main Differences Between UCITS and AIFs

3. Advantages and Disadvantages

Advantages of UCITS

• Accessibility: Simple and accessible investment for individuals.
• Liquidity: Fast transactions (purchases/sales) thanks to daily valuation.
• Strict Framework: Rules for transparency, diversification, liquidity.

Disadvantages: Access is limited to certain asset categories, mainly restricted to listed stocks, bonds, and money market instruments issued by governments and large companies.

Advantages of AIFs

• Asset Flexibility: Ability to invest in unlisted assets (real estate, infrastructure, forests, etc.).
• Return Potential: Diversified investment strategies, potentially more profitable in the long term.
• Access to Professional Investors: Possibility of having complex strategies.

Disadvantages: Less liquidity, less frequent valuation, often reserved for sophisticated investors.

4. How to Choose Between UCITS and AIFs?

The choice between UCITS and AIFs depends on the investor's profile:

• A retail investor who prioritizes liquidity will opt for UCITS, an ideal solution for simple and secure investment.
• A more sophisticated investor seeking higher returns may turn to AIFs, which require a good understanding of risks.
• An investor wishing to diversify their assets across unlisted assets will find AIFs a more suitable alternative.

Conclusion

UCITS and AIFs meet different needs. UCITS prioritize liquidity and investment simplicity, while AIFs offer more flexibility and diversification, but with a more technical framework and less accessible products. Before investing, it is essential to assess your risk tolerance, objectives, and investment horizon.

Some life insurance contracts offer a combination of UCITS and AIFs, thus allowing investors to benefit from the advantages of both types of funds.