Last Updated: 5 February 2010
Article by Martin Cornish and Andrew R. Thomas

This article is the first in a series of publications relating to UCITS and future developments. The purpose of this piece is to provide a high level overview of (i) the historical background to Undertakings for Collective Investment in Transferable Securities (UCITS); (ii) the current position under UCITS III and in particular looking at (a) the Commission of European Securities Regulators (CESR) guidelines concerning eligible assets for investment, and (b) an overview of the options available for traditional hedge funds and fund of funds to now operate within the UCITS framework; and (iii) the proposals relating to UCITS IV due to come into force in July 2011.

Throughout 2009 and, more recently, since the publication of the proposals regarding the draft Alternative Investment Fund Management Directive, there has been a notable uptick in client interest regarding UCITS that has led to numerous asset managers establishing additional UCITS funds, adding UCITS funds for the first time to their portfolio of alternative investment funds or simply investigating and trying to understand the parameters in which a UCITS can invest and be marketed.

UCITS: The Beginning

The objective of the original UCITS directive, adopted in 1985, was to allow for open-ended funds investing in transferable securities to be subject to the same regulation in every Member State within the European Union. Its three main objectives were (i) to keep regulation up to speed with changes in the investment market; (ii) to create a level playing field for funds established in different Member States; and (iii) to ensure investors were well-protected by a single regulator across all markets.

UCITS III: Extending the Investment Scope of UCITS

Following the implementation of UCITS, there were clear signs that the objectives were not being properly satisfied. The marketing rules of various Member States hindered companies wishing to market their products across borders and the definition of "permitted investments" was already becoming redundant in an investment universe demanding innovation, greater returns and more sophisticated products. Finally in 1998, after an aborted attempt to introduce UCITS II, the European Commission published its proposals for UCITS III. This was adopted in 2001 by way of the Directive 2001/107/EC (the "Management Directive") and Directive 2001/108/EC (the "Product Directive") of the European Parliament and of the Council. All Member States were compelled to implement this by February 2007.

The Management Directive sought and continues to seek to give management companies a "European Passport" to operate throughout the European Union, and widens the activities which they are allowed to undertake. It also introduces the concept of a simplified prospectus, which is intended to provide more accessible and comprehensive information in a simplified format to assist the cross-border marketing of UCITS throughout Europe.

The Product Directive in short sought and continues to seek to provide funds the ability to invest in a wider range of financial instruments than was previously the case, e.g., standard long-only funds.

UCITS III funds are currently classified either as "sophisticated" or "non-sophisticated" UCITS funds, depending on the investment powers they choose to adopt. Non-sophisticated funds under UCITS III continue to operate using the same structure as traditional long-only funds, consisting primarily of bonds and equities. Sophisticated funds, however, whilst being able to adopt the vanilla approach outlined above, may also invest in a broader range of asset classes, derivatives and strategies. As part of this investment evolution, it soon became clear that this wider universe of investment powers required guidance from the regulators as to what was permissible within UCITS III. In March 2007, CESR published guidelines relating to eligible assets for investment by UCITS.

Eligible Assets

Eligible assets for UCITS continues to be an evolving platform, and when establishing a fund it is advisable to seek advice as to whether the proposed investment objective and strategy of the fund would in fact be UCITS compliant. The below is intended to be a high-level summary only.

CESR's guidelines were aimed at removing uncertainty as to whether UCITS can properly invest in the following financial instruments: (i) asset-backed securities; (ii) listed closed-ended funds; (iii) Euro commercial paper; (iv) index-based derivatives; and (v) credit derivatives.

The Directive on eligible assets for UCITS lays down rules clarifying, for the purposes of their uniform application, transferable securities, money market instruments, liquid financial assets connected with financial derivative instruments, transferable securities and money market instruments embedding derivatives, techniques and instruments for the purpose of efficient portfolio management and index-replicating UCITS.

The following may be regarded as key developments in the categorisation of eligible assets for UCITS: (i) closed-end funds are regarded as transferable securities provided that they are subject to certain corporate governance mechanisms; (ii) credit derivatives are regarded as eligible for a UCITS provided that they are in compliance with the criteria applicable to OTC derivatives; (iii) derivatives on a single commodity remain forbidden; and (iv) financial indices, whether or not comprised of eligible assets, can be considered as eligible financial indices once they are sufficiently diversified, represent an adequate benchmark for the market to which they refer and are published in an appropriate manner.

UCITS versus Hedge Funds

UCITS III with its broader investment powers now offers hedge fund managers the ability to use similar strategies and techniques within the UCITS framework, albeit with some important distinctions. Shorting is one of these exceptions. Whereas a hedge fund can short-sell a physical stock or bond, a UCITS III fund is not permitted to do so. However, by investing in a derivative of a particular stock, an asset manager can achieve the same shorting effect. Other major differences include the requirement for a UCITS fund to provide twice monthly liquidity as a minimum as well as its inability to leverage more than 100% through the use of financial derivative instruments.

The appeal of UCITS III products accessing true hedge fund strategy has now spread from the retail to the institutional market which is drawn to high transparency, regulated risk management and improved liquidity offered. With industry projections for 2012 predicting €8,000 billion invested in UCITS products, an increase of 60%, few asset managers can afford to ignore the potential for UCITS products.

UCITS Fund of Funds

Greater numbers of UCITS fund launches and UCITS qualifying hedge funds have also led to a UCITS product base sufficiently diversified to trigger asset managers to establish UCITS fund of funds.

By way of summary, the principle rules relating to UCITS fund of funds are as follows. A UCITS fund may not invest in any fund which invests more than 10% of its assets in other collective vehicles ("funds of funds of funds") itself in order to prevent "pyramiding" or "cascading" structures. In addition, a UCITS may not invest more than 10% (or 20% if so allowed by the Member State) in any single fund, nor may a UCITS acquire more than 25% of the units of any other UCITS or other fund.

A UCITS may invest in non-UCITS funds, but only if the non-UCITS fund (i) has the sole objective of collective investment of capital raised from the public in transferable securities; (ii) operates on a risk-spreading principle; (iii) issues units which are redeemable out of the assets of the fund at the request of the unit holder; (iv) is subject to equivalent supervision and investor protection as a UCITS fund; and (v) publishes annual and semi annual reports.

In addition, no more than 30% of a UCITS's assets may be invested, in the aggregate, in non-UCITS funds.

To prevent any potential double-charging which may occur within a fund of funds structure, a UCITS employing such a structure must disclose management fees charged by the underlying funds; if the UCITS invests in funds that are under common management with the UCITS, no subscription or redemption fees may be charged by the fund of funds UCITS.


UCITS IV is due to come into force across EU Member States in July 2011.

The principle features of this legislation are:

  • Management company passport allowing UCITS authorised in one Member State to be managed remotely by a management company established in another Member State. In practice, currently, a management company can only manage a UCITS where it is domiciled in the same Member State as the fund.
  • Simplification of the procedures for cross-border distribution to minimise the ability of Member States to impose their own local registration requirements. Currently, different Member States impose their own local registration requirements which can vary on a country-by-country basis.
  • Framework for the domestic and cross-border mergers of UCITS allowing consolidation of UCITS and potential reduction of the Total Expense Ratios of such funds currently passed on to investors.
  • Introduction of master-feeder structures to facilitate (mostly tax-driven) asset-pooling.
  • Replacement of the simplified prospectus with a key investor information document designed to present comprehensible information similar for the UCITS of each Member State.


The positive aspects of UCITS III and the proposals set out under UCITS IV should be readily apparent. It has opened the doors to European investing in a lower risk regulatory environment and made a wider range of strategies and techniques available to mainstream investors. With some industry experts predicting the hedge fund industry will break up its liquid strategies into UCITS funds and its less liquid strategies into more private equity styled vehicles, now more than ever, UCITS is an investment product not to be ignored as part of the armoury of every fund provider.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.