EUROPE: EC publish research on UCITS funds’ use of wider investment powers

Tuesday February 12 2008

The European Commission has published new research on investment policies of UCITS funds and their use of derivatives under UCITS III .

The study confirms the increasing use of wider investment powers by UCITS III managers. It shows that the UCITS III framework provides a very flexible environment and allows managers to implement innovative strategies. The survey also finds that fund managers develop strong risk management procedures before launching new, more complex products and that Asset managers consider the suitability of their funds for retail investors as well as the risk management process they need before launching such funds.

The study takes stock of how UCITS managers have used these new investment possibilities to invest in a much wider range of eligible assets, to invest in derivates for hedging and leveraging purposes, and to pursue new types of investment strategy (index-based investing, fund of fund strategies).

The study finds that a large number of UCITS funds have started to invest in derivatives. It finds that intensive use of derivatives is confined to a small subset of UCITS funds and that generally, UCITS tend to use derivatives more intensively than non-harmonised fund managers who either do not use leverage, or have recourse to other methods to leverage fund performance (borrowing, short selling). UCITS funds making intensive use of derivatives do not exhibit a higher level of market risk in comparison with other surveyed funds. The study finds that the current UCITS framework is judged by fund managers to provide a high level of flexibility in terms of investment powers.

The study will now feed into the Commission’s reflections and preparatory work for the forthcoming communication on non-harmonised investment funds to be published in autumn 2008. The study will be one of the items discussed at an open hearing on non-harmonised retail funds and real estate funds that the Commission will organise in Brussels on 8 April 2008.

The study can be found at the above link, and an Appendix to it can be found here – http://ec.europa.eu/internal_market/investment/docs/other_docs/pwc-report-annex_en.pdf

For information on the April opening hearing click here.