Opportunities for US Hedge Fund
Managers: Why UCITS?
13 July 2009
Neil Simmonds
neil.simmonds@simmons-simmons.com
Opportunities for US Hedge Fund Managers
 Why UCITS?
 Strategies that can work in UCITS
 The Basics
 Setting up a UCITS: Some Key Points
 Derivatives and Prime Brokerage
 Looking Ahead…. UCITS IV
 Q&A
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Opportunities for US Hedge Fund Managers: Why UCITS?
Because:

…. the level of regulation affecting HF managers is increasing anyway

…. the AIFM Directive will mean you will (probably) need to rethink the domicile of your
funds for the European market or at least restructure them

…. your strategy (probably) can be adapted to fit within its constraints

…. the UCITS passport allows you to access new markets

…. UCITS allows you to diversify your product offering/your business

…. institutional investors are demanding it and can allocate easier to UCITS

…. (It’s not actually very difficult!)
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The Basics (1) – What is it?
 UCITS Directive (1985/611/EEC) + UCITS III amendments
 UCITS II never happened = package of measures no agreement reached
mid 90s
 UCITS III – Management directive and Product directive
 Eligible Assets Directive (2007/16/EC) in force 23 July 2008
 UCITS IV – Re-Cast Directive due to be in force by July 2011
 Passport to sell to retail investors throughout EEA
 A more regulated product for institutional investors in liquid strategies
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Strategies that can work in UCITS
 Any liquid strategy:
–
long/short equity
–
market neutral
–
absolute return equities or bonds
–
global macro (sovereign debt, currency, fixed income, futures)
–
event driven
–
merger arbitrage
–
convertible bond arbitrage
–
managed futures/CTA (but note commodities exposure)
–
emerging market debt and equity
–
structured products
–
fund of funds
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The Basics (2) – What can you do?
 Eligible Assets:
–
Transferable securities (listed stocks and bonds so not private equity)
–
Derivatives (exchange traded or OTC)
–
Money market instruments (MMI)
–
Deposits
–
Collective investment schemes (CIS)
–
Not Commodities/Property/Private equity/Hedge funds
 10% “Trash” (can include some hedge funds)
 Indices and structured notes
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Indices
 Derivatives must not be used to circumvent the Directive
 Underlying must be eligible assets or: interest rates, FX rates, currencies and
financial indices
 Acceptable underlying excludes: - commodities, hedge funds/private equity
funds, property
 But – Derivatives linked to indices are eligible if…
 Criteria for financial indices are satisfied i.e.:
–
Sufficiently diversified
–
Represents an adequate benchmark
–
Published in an appropriate manner
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Structured notes
 Qualify as transferable securities if:
–
meet TS criteria even if:
–
backed by/linked to performance of ineligible assets
–
therefore exposure to commodities and other alternative asset classes?
 Embedded derivative component – look through applies
 No embedded derivative component – no look through applies
 Delta 1 exposure not treated as embedding a derivative (Lux/Ireland)
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The Basics (3)

Spread Requirements:
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No more than 20% in another single CIS (max 30% non-UCITS)
–
No more than 20% deposits with single credit institution (1)
–
5/10/40 Rule for securities/MMI of single issuer (2)
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No more than 20% securities/MMI of single group
–
Max OTC counterparty exposure 5% (10% for banks) (3)
–
No more than 20% in combination of (1), (2) and (3)
–
GAPS limited <35% single issuer/>35% max 30% single issue and at least 6 issues

Concentration Rules:
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No significant influence (20% + voting shares)
–
No more than 10% of the non-voting shares/debt securities/MMIs of issuer
–
No more than 25% of the units of a CIS

Borrowing – only 10% and for “temporary purposes”
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Setting up a UCITS: Some Key Points
 Domicile (not Cayman but where?)
 Umbrella or stand alone?
 More regulation / Real Regulation
 Approval Processes (Promoter/Fund)
 Risk Management Process (RMP)
 More frequent liquidity
 Position of Prime Brokers quite different
 Gates but no side pockets
 Short positions must be synthetic and obligations covered by cash/other liquid
assets
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UCITS and Derivatives
 Investment purposes and/or hedging
 Underlying - Eligible assets PLUS indices, FX rates, interest rates, currencies
 Global exposure related to derivatives not to exceed NAV
 i.e. Leverage permitted but only > 100% + 10% borrowing
 But VaR may be used for “sophisticated UCITS” to achieve greater leverage
 Counterparty exposure (5%/10%)
–
net exposure less collateral received
–
exchange-traded derivatives deemed free of counterparty risk
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PB or not PB – UCITS and Prime Brokerage
 Custody
 Extension of Credit – 10% Borrowing Limit
 Stocklending and Repos
 Provision of Margin
–
Permitted in respect of derivatives, stocklending and forwards
–
OTC derivatives exposure limits
 Granting of security
 Rehypothecation – in respect of margin only
 Leverage limits
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UCITS IV – Where are we in the process?
 January 13, 2009
–
European Parliament approved the text of the UCITS IV Directive
 Council adopted in June 2009
 FSA Consultation likely late 2009
 In most respects, Member States required to update their local laws by 1 July
2011
 CESR Level 2 Guidance by 30 October 2009
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UCITS IV – What’s it trying to address?
 Objectives
–
Codify (consolidate) UCITS into one Directive
–
Tackle bottlenecks to industry efficiency
 Concerns
–
Administrative obstacles and delays in “passporting” UCITS
–
Failure of the simplified prospectus to achieve its objective
–
Fragmented EU fund industry and the lack of economies of scale
–
Failed implementation of management company passport
–
Lack of co-operation among regulators
 Not trying to extend investment powers beyond UCITS III
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What does it cover?
 Simplified notification
 Key Investor Information Document (KIID)
 Cross-Border Mergers
 Master/Feeder Structures
 Management Company passport
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Strategies that can work in UCITS
 Any liquid strategy:
–
long/short equity
–
market neutral
–
absolute return equities or bonds
–
global macro (sovereign debt, currency, fixed income, futures)
–
event driven
–
merger arbitrage
–
convertible bond arbitrage
–
managed futures/CTA
–
emerging market debt and equity
–
structured products
–
fund of funds
© Simmons & Simmons 2008
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Questions and Answers…..
© Simmons & Simmons 2008
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