This presentation serves as study notes for the e-learning material titled: "South African Hedge funds and International Developments" These notes focus on UCITS IV and its Impact on the Industry. http://www.hedgefund-sa.co.za/ucits

1. UCITS

2.  UCITS are a set European Union Directives that
allow collective investment schemes to operate
liberally throughout the EU
 single authorization from one member state
 further regulatory requirements have been
enforced by member states, obstructing free
operation with the aim of protecting local asset
managers.
 original UCITS Directive compiled in 1985
 Hope to achieve standard legislation within the EU
 One step towards achieving a single EU financial
services market

3.  Different marketing regulations in member
states
 Difficulty in cross border marketing of UCITS
 Draft to amend 1985 Directives accepted in
2001
 Birth of UCITS III which is currently on force
 Fund managers may be registered in domestic
country

4.  UCITS IV proposal approved in 2009
 Update to UCITS III with some amendments
 basis for the proposed framework of the
“Regulation of South African Hedge Funds”
 May help in the understanding of the South African
framework

5.  greater transparency
 improved liquidity
 enhanced risk management
 better investment strategies
 Redemption Settlement Periods no longer than
14 days
 Leverage limits
 Investor protection
 Simplification of procedures

6.  Allowing investment opportunities using
different strategies without distorting returns
 Leverage may be used
 Sophisticated strategies may be used
 Cross border distribution opportunities
 Cost effective
 No need to register with every EU state
 Investors may find UCITS effective
 Help in diversification

7.  Asset managers view it as a burden
 Costly exercise, resource draining but very
little benefits
 Failed to achieve the advertised efficiencies
 Managers operating below par
 Tax systems in different states hindering
efficiencies
 Not all states have implemented UCITS IV

8.  Non-Sophisticated Strategies may be used and
simple in the long run
 Long Only Index Replicating Funds
 Money Market Funds
 Long Only Funds
 examples of long only funds
 Equities
 Corporate Bonds
 Government Bonds
 Money market instruments and deposits.

9.  UCITS - Sophisticated Strategies include:
 Index Tracking Funds – reproduce arrangement of an
eligible index
 Eligible index must be
 Adequately diversified. Low correlation between each other
 Calculated adequately
 Published in public domain
 Managed as a separate entity
 Hedge fund indices may be considered as eligible

10.  Long/Short Equity purchasing market listed
investments
 Physical shorting is not allowed
 Subject to certain limits
 Exposure to Non-Eligible Assets
 Swaps may allow Index Tracking Funds to invest in
non-eligible assets
 Extra valuation policies may be required

11.  invest in other UCITS funds and Eligible Undertakings for
Collective Investments (UCIs)
 UCITS Fund of Funds allowed to invest in unregulated
investments subject to limits
 may invest in other compartments of that same umbrella
structure
 may not invest in any other fund which invests more than
10% of its assets in other funds
 disclosure of management fees charged by the underlying
funds
 Restrictions:
 At most 10% of non-voting shares
 debt securities or money market instruments of a single issuing
body
 At most 25% of the interest of an underlying UCITS fund or
Eligible UCI
 certain exemptions

12.  Investing in Commodities through Exchange
Traded Funds
 Investing in Commodities through an Eligible
Index
 Commodity Trading Advisor Funds

13.  At least one feeder
 Must be approved by the EU member state
 Application to the Regulator with key
information disclosed
 KIIDs presented
 Agreements, rules of conduct between master
and feeder funds may be located in different
EU states

14. The following should be in place for structure to
be adequate:
 Prime Broker
 Custodian – protects assets
 Management Company – management of
funds and investments
 Auditor – auditing annual reports
 Administrator – shareholders and fund’s
Registrar
 Directors – determining strategy