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Opportunities for US Hedge Fund Managers: Why UCITS?

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

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Opportunities for US Hedge Fund Managers: Why UCITS?

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  1. Opportunities for US Hedge Fund Managers: Why UCITS? 13 July 2009 Neil Simmonds neil.simmonds@simmons-simmons.com

  2. 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

  3. 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!)

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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)

  9. 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”

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. What does it cover? • Simplified notification • Key Investor Information Document (KIID) • Cross-Border Mergers • Master/Feeder Structures • Management Company passport

  16. 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

  17. Questions and Answers…..

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