UCITS is an acronym for the Undertakings for Collective Investment in Transferable Securities Directive 2009/65/EC. It is a consolidated EU Directive outlining the regulatory framework allowing collective investment schemes such as mutual funds to operate freely throughout the European Union (EU) in a harmonized environment. Although EU member states are entitled to have additional regulatory requirements for the benefit of investors, UCITS funds are permitted to operate on the basis of a single authorization from one member state once the standards have been met.
The primary intended investor base are retail clients. Because of the regulatory hurdle that must be cleared in order to operate, UCITS funds are perceived as safe investments, at least from an investor protection point of view. These well-regulated investments and are popular in Europe, South America, and Asia. Diversified investors who prefer to invest in a range or portfolio of public limited companies can utilize these funds to obtain exposure to unit trusts spanning the European Union.
If a mutual fund, index fund or even an ETF complies with these standards, it can be marketed to retail investors across Europe because it adheres to common standard for risk and fund management. This framework helps these products avoid requiring regulatory approval from each individual member state of the European Union. For a list of event driven investment funds, (not all of which may be compliant) see our “List of Event Driven Hedge Funds“. Although the funds are share a common regulatory framework in Europe, investors from across the globe are able to invest in UCITS funds.
The following table lists the minimum standards that UCITS funds must adhere to in order to gain authorization for sale to Europe’s retail investors.
| Standard | Requirement |
|---|---|
| Liquidity | Funds are redeemable on demand although in practice regulators may permit deferred redemptions in times of market stress |
| Risk management | UCITS managers must employ a detailed risk management policy such as the 5-10-40 rule |
| Transparency | UCITS funds must produce annual and semiannual financial reports and calculate a net asset value at least fortnightly |
| Restrictions | UCITS funds may invest only in eligible assets and is subject to diversification limits |
| Leverage limits | UCITS funds may not have total market exposure exceeding 200% of its net asset value |
| Service providers | UCITS funds must have a custodian and an independent auditor both of which have duties of care to the fund’s investors |
UCITS History
The objective was to allow for open-ended funds investing in transferable securities to be subject to the same regulation in every Member State. The reality differed somewhat from the expectation due primarily to individual marketing rules in each Member State that created obstacles to cross-border marketing of UCITS.
Accordingly, in the early 1990s proposals were developed to more successfully harmonize laws throughout Europe. In July 1998, the EU Commission published a new proposal which was drafted in two parts, a product proposal and a service provider proposal. These proposals were finally adopted in December 2001, and are known as “UCITS III“, which are now in force.
UCITS funds are very popular investments due to their perceived safety in terms of regulation (not necessarily in terms of market performance). The European Commission states tah funds which are compliant with the framework account for approximately 75% of all collective investments made by private investors in Europe. In light of this, many mutual fund providers include “UCITS-compliant” in their promotional materials as part of their marketing strategy.
