Undertakings for Collective Investments in Transferable Securities III (UCITS III)

Financial Terms By: U

A set of Directives adopted in December 2001 which amended UCITS I. UCITS III consists of two directives, a "Product Directive" and a "Management Directive".

1) Product Directive: Product Directive removes barriers to the cross border marketing of units of collective investment funds by allowing funds to invest in a wider range of financial instruments including derivatives.

2) Management Directive: Management Directive gives management companies a "European Passport" to operate throughout the EU, which widens the range of activities management companies are allowed to take and also assists the cross-border marketing.

The UCITS III revision gave asset managers a broader scope. At the same time, the requirements on investor protection were increased and called for an independent risk management function (to limit/monitor leverage, counterparty risk, concentration limits, etc.). UCITS III expanded the range of available investments to include derivatives for investment purposes, other UCITS and cash. This dramatically increased investor choice, allowing for cash funds, funds of fund, mixed asset funds and absolute return UCITS or UCITS hedge funds. This has allowed a number of hedge fund strategies to be accommodated within the UCITS format such as equity long/short, relative value, etc. Some strategies, however, remain difficult to implement within the UCITS framework because the underlying asset class is not permissible (for example, individual commodities or bank loans) or because of the lack of liquidity (for example, distressed debt).