Mutual Funds That Behave Like Hedge Funds: UCITS III and UCITS IV
UCITS III and UCITS IV: Undertakings for Collective Investments in Transferable Securities
More and more retail investment managers are adopting hedge-fund style investment strategies to improve the risk and return of their products. This has only recently been allowed in Europe for ordinary "retail" investors. There are now a lot of new "Absolute Return" funds, but many other funds also use similar techniques or use derivative for other strategies.
UCITS or the Undertakings for Collective Investments in Transferable Securities are managed funds (e.g. mutual funds, unit trusts, OEICs etc.) sold to retail investors in the European Community. UCITS III is the latest directive dating back to 2001 that controls the use of derivatives in these investments. Since then, managed funds sold to retail investors have been allowed to use derivative (options, warrants etc.) to implement strategies similar to those employed by Hedge Funds. So, rather than having "long-only" funds it is possible to make money when the market falls by shorting the market using derivatives (direct shorting of shares is not allowed) or to apply leverage to increase exposure to the market.
UCITS regulation dates back to the 1985, with the first UCITS European Directive: UCITS I, the current, UCITS III has been in force for several years and the new revised UCITS IV is due to be announced in about June 2010
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Sophisticated and Non-Sophisticated UCITS III
Sophisticated and Non-Sophisticated UCITS
Managed funds are divided into two categories: sophisticated and non-sophisticated UCITS. The latter being traditional funds that invest in simple financial instruments, whereas the Sophistcated UCITS can invest in derivatives. The derivatives can be used to apply gearing (i.e. leverage), up to double the Net Asset Value (NAV) of the fund. There are a lot of restrictions to exactly what can and cannot be done.
UCITS IV is a revision of the UCITS rules after the recent global economic crisis to improve the safety (June 2010)
Derivatives, Options, Warrant Books
Absolute Return Funds
And Other Funds That Use derivatives
Absolute Return Funds
and Other Funds Using UCITS Rules
There have been a lot of new launches of Absolute Return Funds, after the recent credit crisis that all use derivatives to reduce the effect of any downturn in the market. e.g. BlackRock UK Absolute Alpha, Threadneedle Absolute Return Bond fund, JPMorgan Cautious Total Return and similar funds from Credit Suisse and UBS.
In addition to these funds sold specifically with an Absolute Return target there are more general funds such as Fidelity Special Situations that aims to beat the market, but can use derivatives to protect against falling share-prices or to take advantage of mispriced stocks and shares.