The study, carried out by PriceWaterhouseCoopers, shows that the portfolios of UCITS funds (Undertakings for Collective Investment in Transferable Securities) are increasingly made up of products such as futures, options, swaps and other derivatives.
In 2006, futures were present in 31% of the collective investment funds surveyed, compared to 18% registered in 2002. Options, which remain the main derivatives in terms of weight in net assets (40% of the total), increased their presence from 14% of UCITS in 2002 to 20% in 2006. In the same period, swaps passed from 1% to 12%.
The changes in the presence of derivatives were registered both before and after the entry into force in 2004 of the UCITS III Directive which further regulates the market for harmonised collective funds in Europe, allowing their managers to invest in a wider range of assets (EurActiv 15/01/05).
"The study confirms the increasing use of wider investment powers by UCITS III managers. It shows that the UCITS framework provides a very flexible environment and allows managers to implement innovative strategies," underlined Internal Market Commissioner Charlie McCreevy.
This does not appear to have led to an increased risk exposure, although the sub-prime crisis highlighted the liquidity issues facing UCITS funds, which according to EU rules are obliged to take into account their own liquidity requirements in order to be able to meet redemption requests from shareholders at any time.
However, acknowledging the additional risks linked to leverage and valuation, the study concludes that "such potential risks did not impact the performance/risk profile for investors".
It emerged that UCITS fund managers were decisive in keeping risk at low levels. "Asset managers are usually prudent before investing in new and complex instruments," underlines the report, adding that they "prefer to delay the launch of new products instead of having a fund without proper risk management and valuation procedures".
McCreevy echoed this, highlighting that the report "shows that fund managers take their responsibilities vis-à-vis retail clients very seriously".
As well as UCITS funds, the report also focused on non-harmonised funds such as hedge funds. The wide scope of the research carried out for the European Commission is "a proof of our commitment to transparent and evidence-based policy development," said McCreevy.
Financial services industry representatives, in a press release, repeated their own commitment "to work closely together and with other interested stakeholders to make timely improvements" in transparency and disclosure in the European securitisation market.