Fri, Apr 18, 2014
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   |   
Banner
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. CTAs could face new challenges in a rising rates environment[more]

    Bailey McCann, Opalesque New York: CTAs have taken a beating performance wise lately, and asset flows reports show that investors aren't sticking around to see how the movie ends. Now, a new white paper from Roy Niederhoffer and Coen Weddepohl notes that as interest rates start to tick back u

  2. Investing – Big hedge funds bought Puerto Rico's junk bonds, Fidelity explores new trading venue amid flash trade concerns, Crisis-era Greek bonds reward early buyers with big effective returns, Cargill unit discloses stake in Freddie preferred[more]

    Big hedge funds bought Puerto Rico's junk bonds From Reuters.com: Several large hedge funds doubled down on Puerto Rico in last month's giant bond sale despite the U.S. territory's financial struggles, the Wall Street Journal reported, citing confidential documents reviewed by the newspa

  3. Opalesque Exclusive: Classic Auto Funds Limited (CAF) launches several car investing funds[more]

    Bailey McCann, Opalesque New York: A new trend in alternative alternatives is emerging - car appreciation funds. Classic Auto Funds Limited (CAF) is the first to market with several funds that make super elite luxury cars into real asset investments. As a result of growing overseas demand couple

  4. Commodities – Popular value fund manager David Iben bets on Russia, gold,[more]

    From Reuters.com: With large bets on Russia and North American gold miners, one of the best performing stock pickers in the wake of the 2008 financial crisis is back with a new fund that reflects his deep aversion to following the crowd. In the Kopernik Global All-Cap Fund, David Iben is follo

  5. Opalesque Exclusive: Pensions, endowments, family offices reconsider life settlement investments[more]

    Bailey McCann, Opalesque New York: Hedge funds were once the largest investors in the life settlement industry, now the industry is seeing more interest from pensions, endowments and family offices directly. Life settlements have always been considered a niche part of the investing landscape, an