UCITS, or Undertakings for Collective Investment in Transferable Securities, are common in Europe, Asia and Latin America, but have yet to really catch on in the US. They are more heavily regulated than typical hedge funds, require independent custodians, 14-day liquidity, have leverage limits, and heightened reporting requirements. Adhering to such requirements allow managers to offer their funds in any of the European Union member states.

Q. This is already a very important term for European, Asian, and Latin American investors, but it’s becoming a lot more important here, too. First, what’s it stand for?

A. Undertakings for Collective Investmetnt. You can think of it as a global version of our 40 Act vehicles: a standard set of rules for collective investment companies. UCITs were born in Europe– Luxembourg is the real center — and that’s where they’re really huge, but because of their features they’ve been catching on in Asia and Latin America, too.

Q. So what are the key features?
A. What investors and regulators like about these is they have pretty strong governance requirements, independent custody, 14-day liquidity, limited leverage, and reporting. What managers liked initially was their ability to offer a retail product throughout the Eurozone. And then this package of features started being accepted throughout Asia and LatAm, too. So it’s quite a big deal outside the US.

Q. But, also, inside the US now?
A. Increasingly so, because US hedge fund managers want to attract non US money. For a long time, non-US investors would access US managers through a Cayman Island or other offshore partnership… but these were not standardized. We’ve talked before about “master feeder” structures like this, and most big US hedge funds have them. But, increasingly, European investors are demanding adherence to UCIT standards, and several major European financial institutions have set up “platforms” to make it easier for US managers to establish their own UCITs.

Q. But what about US investors looking for access to European managers?
A. Well, the JOBs act might just make that a lot more popular. Of course, to offer UCITs here, you have to follow US securities laws, which don’t recognize them.. so you’d have to offer them as a private placements. But with the upcoming changes to the private placement rules, that suddenly looks quite possible. So UCITs could become a big part of the US investing landscape soon.