CESR publishes today an Issues Paper entitled: ‘Can hedge fund indices be classified as financial indices for the purpose of UCITS?’ (Ref. CESR/05-530).
Through the publication of this paper, CESR wishes to take the opportunity to request additional input into the debate on eligible assets under the UCITS Directive in relation to the inclusion of hedge fund indices, in particular. Through this Issues Paper CESR’s indicates its desire to ensure the full breadth of views and opinions that market participants and retail investors hold on this issue are fully heard before reaching any formal conclusion. Following thorough reflection of the responses received, CESR will publish a consultation document which will set out CESR’s possible preliminary position in February 2007.
The decision to explore more thoroughly the issues arising from the potential inclusion of hedge fund indices in UCITS, should be seen in the wider context of CESR’s final advice to the European Commission on clarification of definitions concerning eligible assets for investments of UCITS (Ref. CESR/06-005) submitted in January 2006, which set out in detail its views on the criteria that should be met by a financial index for derivatives in order for the index to be an eligible investment. In developing the advice and the two rounds of consultation CESR already analysed many of the comments received, which suggested that hedge fund indices should also be considered by CESR as an eligible underlying asset for derivatives. However, given the complexities of hedge funds indices and the fact that they are still developing CESR concluded that that further work could be necessary to assess whether hedge fund indices could be considered as financial indices for the eligibility of UCITS. Therefore, CESR decided to monitor the issue further in particular with respect to the impact of derivatives on hedge fund indices posed a number of questions regarding the risk profile of UCITS and the risk that retail investors might not be able to assess the impact.
The Issues Paper therefore seeks additional input from market participants and investors on these difficult topics. CESR is willing to develop dialogue in particular on the material biases generally thought to affect hedge fund indices (whilst also noting that some of these issues can also affect ‘traditional’ indices). It seeks views of the impact of potential ‘database biases’ and ‘index biases’ and in relation to the latter, seeks to explore what might represent an ‘adequate benchmark’.
Furthermore, CESR asks views in relation to whether hedge fund indices can qualify as ‘financial indices’ and asks stakeholders, whether to assist in this context, CESR might develop Level 3 measures regarding compliance with the obligations in relation to ‘sufficient diversification’.
The European Commission has now presented for discussion its proposals on eligible assets, in the form of draft legislative text, to the European Securities Committee and the European Parliament. The text of the Level 2 implementing measures on UCITS eligible assets will be supplemented by Level 3 measures adopted by CESR. If any measures are thought to be necessary on hedge fund indices, following this consultation, the intention of CESR, at this stage, is to address these as well through the measures adopted at Level 3.
Next Steps
The Expert Group on Investment Management now proposes to proceed its work with respect to hedge fund indices in a two-step approach. As a first step, the Expert Group on Investment Management has prepared this issues paper to gather relevant and precise views from all interested parties as it feels that, at this stage, more information is necessary to come with a concrete proposal. Also on the basis of responses to the consultation on the issues paper, a second step would entail the publication in February 2007 of a consultation document expressing CESR’s position.
Finally, CESR requests comments and reactions to the questions raised in the document by 30 November 2006 through its website under the section ‘consultations’.
