The Committee of European Securities Regulators plans to review the use of hedge fund-linked products as assets in funds within the undertaking for collective investments in transferable securities framework. In its consultation on possible modifications of UCITS III, some industry officials are predicting CESR could rule against hedge fund indices and other fund-linked products being used in the wrapper.
Lawyers are warming up for a battle when the consultation starts, likely in March or April. Some market players are adamant the use of hedge fund-linked products within the UCITS III wrapper goes against the spirit of the legislation, which is to create a European-wide regulated wrapper for retail investment funds. Others, however, see the wrapper as an ideal vehicle for selling hedge fund products to retail investors.
"There may well be a feeling that [CESR has]opened a Pandora's box," said Tim Cornick, partner at Macfarlanes in London. Lawyers say it would be difficult for CESR to rule against UCITS III funds referenced to hedge fund indices, in view of the fact several local regulators have given the go ahead for such products. "It would be quite an upheaval," said Cornick. Simon Gleeson, partner at Allen & Overy in London, agreed, but noted that just because it would be difficult does not mean it would not happen.
