Article 50(2)(a) of the UCITS Directive permits UCITS to invest up to 10% of its net assets in transferable securities and money market instruments, other than those eligible assets referred to in Article 50(1). This is known as the “trash bucket”. There has been a long standing debate as to whether UCITS could use this 10% “trash bucket” to invest in unregulated hedge funds. Some regulators had interpreted Article 50(2)(a) of the UCITS Directive as permitting UCITS to invest in unregulated investment funds (including hedge funds) provided the investment complied with the eligibility criteria for UCITS. The European Securities and Markets Authority (ESMA) has issued a formal opinion on their interpretation of Article 50(2)(a). 

ESMA is of the opinion that UCITS may only invest in units or shares of collective investment undertakings as defined in Article 50(1)(e) of the UCITS Directive (ie the requirements for investment in CIS). Accordingly UCITS may not use this 10% “trash bucket” to invest in unregulated hedge funds. The ESMA opinion is not binding but it is likely to be implemented by all EU regulators. ESMA expects that any portfolio adjustments required to ensure compliance with this opinion will be made taking into account the best interests of investors and at the latest by 31 December 2013. No new investments which would not be in accordance with the opinion should be made.

ESMA’s reasoning is that in Article 50(1), only sub-paragraphs (a) to (d) include the expression “transferable security” and only sub-paragraph (h) includes the expression “money market instruments”. It follows that Article 50(2)(a) provides for a derogation from sub-paragraphs (a) to (d) and sub-paragraph (h) of Article 50(1), and not from sub-paragraph (e).