The Committee Of European Securities Regulators has told dealers at an open hearing it will delay deciding whether hedge fund index-linked products are eligible assets in certain retail funds. The delay--for 12 months--is a surprising blow for fund-linked dealers who had thought CESR's most recent consultation would see a final decision reached (DW, 5/27). Nearly two years ago, when the Undertaking For Collective Investment In Transferable Securities was updated to allow investment in derivatives, dealers had mooted UCITS III mutual funds as the holy grail for distributing fund-linked products to retail (DW, 12/22/03).
Dealers said they will pressure CESR to reopen debate over hedge fund indices before the 12 months is up. One official said he plans to talk to the European Fund and Asset Management Association about setting up a working committee to address CESR's concerns about including hedge fund indices in the funds. Steffen Matthias, secretary general of EFAMA, did not return a message.
The blow is particularly tough for dealers who have already structured UCITS III funds with a hedge fund index underlying. Such funds have been passed by regulators in the U.K., Luxembourg and Dublin, but officials noted these regulators appear to have stopped authorizing UCITS III funds with hedge fund index underlying because of CESR's lengthy consultation. Tim Cornick, partner at City law firm Macfarlanes, said it is still unclear whether the funds which exist already will have to be closed or restructured.
According to officials present at the open hearing, CESR's delay is due to residual concerns over the sale of hedge fund-based products in what is essentially a retail fund. But most officials remain optimistic that, even with a lengthy delay, CESR will eventually include hedge fund indices as eligible assets in UCITS III funds. They pointed to the fact that at the same open hearing the committee gave the go-ahead for commodity indices to be included in the funds, even though the funds are not permitted to directly invest in commodities.