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Opportunities for US Hedge Fund
Managers: Why UCITS?
13 July 2009
Neil Simmonds
[email protected]
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
© Simmons & Simmons 2008
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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:
–
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)
–
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:
–
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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