Debate over eligible assets for regulated European mutual funds is providing an opportunity for credit derivatives to be sold in fund format. The Undertaking for Collective Investments In Transferable Securities was intended to widen the range of derivative instruments permitted in regulated funds across Europe. But regulators are still debating the use of derivatives linked to certain asset classes, such as commodities, property and hedge funds, and so fund structurers have turned to credit as an underlying.
Officials at Calyon, ABN AMRO and UBS said they are working on credit structures for these funds right now. Investment managers including AXA Investment Managers and Morley (DW, 8/29) are also working on similar deals. One structuring official at a European firm explained the credit funds will likely be targeted at institutional clients, even though the UCITS wrapper can be sold to retail. He explained institutional clients would choose a fund wrapper over investing directly in the underlying credit structure, because the fund dissipates their counterparty credit risk. Some institutional credit investors, such as insurance companies, say they are already close to reaching counterparty limits with some dealers, he added. The funds may also be structured in certain jurisdictions with tax advantages to straight credit investment, said the structurer, declining to detail which jurisdictions.
"Credit is the new, new thing in UCITS," said Simon Gleeson, partner withAllen & Overy in London, who has seen several UCITS funds using credit-default swaps and structured credit products. Philip Warland, a senior advisor in investment management at PricewaterhouseCoopers in London, agreed credit has become popular in the passportable funds and he has seen proposals for a tranche of CDO wrapped in a UCITS fund. The pair noted both asset managers and dealers have put aside plans for trendy investment funds, such as property index- and commodity index-linked, until the Committee of European Securities Regulators makes its decision on their eligibility, expected early next year. In the mean time, credit is having its day.
