Sun, Aug 28, 2016
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

ESMA rules that UCITS may not invest in unregulated hedge funds

Thursday, November 22, 2012
Opalesque Industry Update - In a further indication of policy orientation at European level that is seeking to limit the instruments that UCITS funds may invest in, on 20 November 2012, the European Securities and Markets Authority ("ESMA") published a formal opinion on its interpretation of Article 50(2)(a) of the UCITS Directive (Directive 2009/65/EC) (the so-called “trash ratio”) which permits UCITS to invest up to 10% of its net assets in transferable securities and money market instruments, other than those eligible assets referred to in Article 50(1).

The Opinion arises from the fact that “questions have emerged about the correct interpretation of this Article and, in particular, whether the derogation…applies to units or shares of collective investment undertakings.”

A number of national regulators, including the Central Bank of Ireland and the CSSF in Luxembourg, have interpreted Article 50(2)(a) as permitting UCITS to invest in unregulated investment funds, including hedge funds, provided the investment complies with the eligibility criteria for UCITS, which is understood as meaning hedge funds that redeem units at the request of unitholders and operate on the principle of risk spreading.

In its Opinion, ESMA states that Article 50(2)(a) refers only to investments in transferable securities and money market instruments and that it does not refer to units or shares of collective investment undertakings.

As a result, ESMA considers that UCITS may only invest in collective investment undertakings that fall within the meaning of Article 50(1)(e), meaning other UCITS, or alternatively, funds that are subject to equivalent supervision as UCITS and which provide an equivalent level of investor protection as UCITS.

In order to comply with the Opinion, UCITS that have investments in hedge funds will be expected to redeem such holdings "taking into account the best interests of investors and at the latest by 31 December 2013". It will be interesting to see whether national regulators look for earlier compliance than the 31 December 2013 deadline.

Following the entering into force of the revised Lamfalussy process, the role of ESMA is to achieve greater consistency in day to day application of EU legislation in the security markets field and it is expected to play an active role in building a common EU supervisory culture and consistent supervisory practice, including by providing opinions to competent authorities and issuing guidelines and recommendations.

Although technically these opinions, guidelines and recommendations are considered to be “soft law” and, therefore, not binding; ESMA’s opinions are a central reference for the work of national regulators. Accordingly, the Opinion should be treated on a comply-or-explain basis by national regulators.

This legal update was published by international law firm Dechert LLP. Corporate website: Source

fg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Strategies - The 'Holy Grail' hedge fund strategy to handle a black swan the size of World War I, Hedge funds get more pushback on terms as enthusiasm for strategy wanes[more]

    The 'Holy Grail' hedge fund strategy to handle a black swan the size of World War I From IBTImes.co.uk: To illustrate a strategic gap common to today's portfolio managers, George Sokoloff, PhD, founder and CIO at Carmot Capital, proposes an interesting thought experiment – a breakdown of

  2. Institutional investors - Investors set to increase allocation to private debt, With investment income key, Richmond retirement system faces funding challenges[more]

    Investors set to increase allocation to private debt Investors are set to increase their allocation to private debt, with 60% revealing they believe the private debt market will grow over the next 12 months, according to a new study by Elian, a leading funds services provider. 41%

  3. Investing - Hedge funds snap up banks, unload Apple, Some of hedge funds' favorite stocks are finally starting to beat the market, Einhorn's Greenlight shifts positions, Treasury yield climbs to two-month high as Fischer joins hawks, 9 stocks smart investors put their money in last quarter[more]

    Hedge funds snap up banks, unload Apple From Barrons.com: Prominent hedge funds have a newfound love of big banks, and some have a distaste for shares of Apple, regulatory filings released last week show. The filings suggest that the funds have been pivoting their portfolios in recent mon

  4. Chesapeake energy seeks $1 billion loan to refinance debt[more]

    From Bloomberg.com: Chesapeake Energy Corp. is seeking a $1 billion loan as the company battered by cratering fuel prices and credit downgrades takes a step to address its $9 billion debt load. The natural gas producer hired Goldman Sachs Group Inc., Citigroup Inc. and Mitsubishi UFJ Financial Group

  5. Institutions - Nordic pension funds magnify focus on unlisted and direct investing, building up teams[more]

    From IPE.com: As bond yields remain at low or negative levels, pension funds and other institutional investors in the Nordic region are stepping up efforts to find higher returns by adding more unlisted investments to portfolios and are expanding in-house teams in order to do this, according to new