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UCITS

UCITS

UCITS are internationally recognized investment products and can be distributed across the globe with an implemented procedure known as passporting. Thus many UCITS funds are not only registered in EU Member States, but also in non-European countries such as Switzerland, Hong Kong or Peru. A further aim of the UCITS regulation is the simplification of provided investor’s information.

Advantages for Investment Managers

Cross-Border Distribution

The cost effective passporting process allows for cross-border distribution of UCITS throughout the EU Member States. The UCITS passport endows investment funds with a significant number of cross-border marketing and distribution rights and offers investment managers at the same time a greater access to investors’ capital. As opposed to offshore investment vehicles without passporting rights, UCITS do not need to be registered separately in every EU Member State and thus guarantee a simplified access to capital.

The fact that UCITS are recognised and regulated investment products following a set of quality standards makes them especially attractive to private investors. But also institutional investors limited through internal investment restrictions, such as pension funds, may be attracted by the regulated UCITS solution.

Cross-border distribution also affects the merger process of UCITS. There are also possible exemptions to the investment diversification limits on single investment vehicles allowing for UCITS to be fully invested in one other UCITS fund and thus allowing for the creation of a master-feeder structure.

Investment Opportunities and Strategies

The UCITS framework allows investment managers to use certain – but not all – sophisticated alternative investment strategies. Nevertheless, some investment managers may be deterred by UCITS requirements and will probably need to verify if their strategies are UCITS compatible.

A wide range of different investment strategies can be implemented through UCITS without unduly prejudicing investment returns, including the use of leverage – although in a controlled manner. The following investment strategies or fund types can be implemented with respect to UCITS regulations:

  • Long Only Funds;
  • Long Only Index Replicating Funds;
  • Money Market Funds;
  • Long/Short Equity;
  • Index Tracking Funds;
  • 130/30;
  • Fund of Funds;
  • Specific Commodity Trading Funds.

Key Advantages for Investors

Greater Liquidity

UCITS have no minimum holding periods and are subject to certain liquidity requirements. This represents one of the strongest advantages of UCITS and guarantees a high degree of investor protection.

Greater Transparency

UCITS are required to report comprehensively and adequately to investors on their portfolio holdings and compute at least a semi-monthly Net Asset Value (NAV), as well as annual and semi-annual financial reports. The UCITS prospectus must be clear to the investor and include comprehensive risk warnings, investment restrictions and disclose possible conflicts of interest. An UCITS must also have a Key Investor Information Document (KIID) describing the investment fund’s main purpose, the investment policy, the historical track record including associated costs as well as investment risk warnings.

Greater Risk Management

Every UCITS is required to employ adequate risk management measures to assess and monitor risk. A report should be regularly made to the regulator on the types of derivative instruments, underlying risks, quantitative limits and the risk management methodology used in relation to transactions in derivatives.

Investment Restrictions

A UCITS must maintain a diversified portfolio and is only allowed to invest in eligible assets. Nevertheless, it may invest all of the assets into another UCITS (master-feeder structure).

Master-Feeder Structure

In order to increase cost efficiency and achieve economies of scale, the UCITS Directive allows the set-up of one or more feeder funds to pool their assets into a single master structure.

  • The feeder fund has to invest at least 85% of its assets into the master vehicle, while the remaining assets have to be invested into liquid assets, derivatives for hedging purposes, movable or immovable properties for the direct pursuit of the business – only in the case of investment companies.
  • The master fund is subject to the diversification limits described in the UCITS Directive
  • The master fund is not allowed to invest in another feeder or be itself a feeder fund.

Taxations

Luxembourg’s attractive tax regime exempts funds from income tax and net wealth tax. Only a 0,05% subscription tax on the total Net Asset Value (NAV) is applicable to UCITS.