On February 12, the European Commission published new research on EU investment funds including analysis of their use of investment powers, investment outcomes and related risk features in both funds established under the EU Undertakings in Collective Investment in Transferable Securities (UCITS) Directive and non-UCITS funds.

The study surveys the investment outcomes (performance and related risks) of UCITS and non-UCITS funds over the five past years since the introduction of the “UCITS III” Directive in 2004 which allowed UCITS fund managers to invest in a much wider range of eligible assets. UCITS III introduced an expanded range of assets included derivatives for a wider range of permitted purposes. It also allowed fund managers to pursue new types of investment strategies such as index-based investing and fund of fund strategies within UCITS funds.

The study concluded that a large number of UCITS funds have started to invest in derivatives although the intensive use of derivatives is confined to a small subset of UCITS funds. Generally, UCITS funds tend to use derivatives more than non-UCITS fund managers who either do not use leverage, or have recourse to other methods to leverage fund performance such as borrowing or short selling.

The study examined the risks associated with the use of enlarged investment powers and concludes that fund managers develop strong risk management procedures before launching more complex products. As such, the study finds that UCITS funds making intensive use of derivatives do not exhibit a higher level of market risk in comparison with other surveyed funds.