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Fund industry leaders set to tackle ‘Newcits’ threat

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Leaders of the European fund industry are calling for action from the European Union authorities because they fear that the success of the Ucits ‘brand’, which has enabled EU-domiciled retail funds to be sold all over the world, is under threat from the use of the structure by hedge fund managers.

 

The past few weeks and months have seen a wave of new launches of so-called ‘Newcits’, which exploit the ability of Ucits managers to use derivatives and a limited amount of leverage to mimic hedge fund strategies.
 
But there is growing concern among industry organisations that the risk is growing of sophisticated Ucits funds being sold to retail investors that do not understand them. Potentially at risk is the success of mostly Luxembourg-based Ucits in markets throughout Asia, where regulators have accepted the vehicle as suitable for sale to the general public.
 
“It is a very great concern,” Jean-Baptiste de Franssu, chief executive of Invesco Europe and president of the European funds association Efama, told delegates at the spring conference of the Association of the Luxembourg Fund Industry (Alfi). “These funds are pushing the Ucits rules on eligible assets to extreme boundaries”
 
“Can we afford to let Newcits develop? They could damage 20 years of work and success up to now. This is an opportunity for the industry to demonstrate that we are ready to call for action when past legislation – in this case the rules governing eligible assets for Ucits – has gone too far.”
 
Sanjiv Sawhney, global head of fund services with Citi in Luxembourg, commented: “As with any innovation, we need to look closely to ensure that these funds are delivering the right level of transparency. If that is in question, it is not worth threatening the strength of the Ucits brand.”
 
The ability of Ucits managers to use derivatives and leverage dates back to the passage of the Ucits III legislation in 2001. At the time these provisions caused concern among Asian regulators, according to Claude Kremer, a partner with Luxembourg law firm Arendt & Medernach, chairman of Alfi and vice-chairman of Efama.
 
“There is legitimate concern about the scope of the European regulation,” Kremer told a press conference in Luxembourg, noting that so far he has not heard specific complaints about the use of Ucits structures to repackage hedge funds.
 
“Asian countries are not bound by European rules. It is up to us to explain it to them – we need to be aware of the issue and ensure that the Ucits brand, which has been highly successful in Asia, is not damaged.”
 
De Franssu, who noted that he was speaking in a personal capacity, since Efama has not yet taken a stance on the issue, also pointed out that despite the media buzz about the rapid growth of ‘Newcits’, there is little evidence yet about what volume of assets they are attracting.
 
But he added: “Many hedge fund managers are looking at the Ucits passport as a great opportunity to broaden their investor base. Some of these funds are so sophisticated that only members of the investment team know their underlying risk. We cannot let them be sold to retail investors.”

 

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