Cross-Border Distribution of UCITS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CONTEXT

The evolution of UCITS is set to continue with the advent of UCITS V, which has been desig- ned with the lessons of the financial crisis, including the Lehman Brothers collapse and the Madoff scandal, firmly in mind. The speed with which UCITS IV is set to follow the imple- mentation of UCITS IV underscores the accelerated pace of regulatory change. Processes like UCITS IV can only set the pace for an even higher penetration of UCITS in all of those countries that believe in the passport and in the solidity behind this world-class brand. However, discussion is on internationally that the setting up of more and more UCITS funds investing in hedge fund like strategies, so-called sophisticated UCITS or “Newcits“ may eventually stain the reputation of the brand. Indeed, fears are mounting that if anything were to go wrong to any Newcits fund, many foreign countries would consequently cool to the reputation of the brand as a whole, i.e. even with regards to those plain vanilla funds that represent most of the total UCITS assets. According to EFAMA, at the end of 2009, Newcits funds assets were up to € 52bn, which represented just below 1% of total UCITS assets; Newcits numbers are increasing steadily and there are many news reports of new fund launches for such strategies. Given the success of such products and the attention they receive from the international media, EFAMA, acting as the centralised European investment funds’ body, calls for the in- dustry to discard the Newcits acronym as it may be confusing: “Newcits are UCITS that can be described as aiming actively to manage the risk-return trade-off. They are subject to and are managed in compliance with the UCITS framework. As such they offer the same level of investor protection as other UCITS“ 15 . EFAMA also openly calls for the newly created Euro- pean Securities and Markets Authority (ESMA) and all Member States’ national regulators to strictly comply with those rules 16 . Since the emergence of the cross-border distribution of investment funds decades ago, Luxembourg established itself as a hub for European cross-border distribution. In 1988, the Grand Duchy was the first European Member State to adapt its legislation to the European Directive governing UCITS, thus propelling the country into its current leading position. The competitive advantage of being the first to offer the European passport for cross-border distribution to investment funds, as well as the continuous adaptation of the country’s legal and fiscal environment, gradually attracted fund promoters from all around the world to Luxembourg. Today, newcomers to the Grand Duchy know that they have access to highly qualified and highly professional specialists who have many years of experience with UCITS and invest- ment funds. Moreover, as the graph below shows, they can rely on the leader in terms of predominance for the set-up of cross-border funds. Although Luxembourg lost ground, shifting from being the domicile of choice for 81% of all worldwide investment funds in 2001 to 75% of those in 2010, the proportion still remain so impressive that will unlikely be beaten. The leadership of Luxembourg and Irish hubs

1.3.1

Since the emergence of the cross-border distribution of investment funds decades ago, Luxembourg established itself as a hub for European cross-border distribution.

15 Source: EFAMA, press release, 16 th May 2011 16 Sources: FSR, “Supporting cross-border fund distribution in a global market-place”, October 2010; Strategic In- sight, “Alternative and Hedge Fund UCITS through the Next Decade”, 2010; HFM Week “Newcits Uncovered”, Ja- nuary 2011; FTfm “Creativity’may tarnish Ucits brand”, 15 th May 2011; EFAMA “The evolving investment strategies of UCITS - EFAMA report on the so-called “Newcits” phenomenon”, May 2011; Ignites Europe “Newcits tag must be scrapped: EFAMA”, 16 th May 2011

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