UCITS Suffering In June

UCITS-compliant hedge funds suffered a small loss in June, dumping them further into the red on the year. The loss

UCITS-compliant hedge funds suffered a small loss in June, dumping them further into the red on the year. The loss comes in line with volumes at leading participants including Reuters, trader sentiment is cautious as the Euro Zone crisis is still uncertain.

The UCITS Alternative Index Global fell 0.23% last month and is down 0.33% on the year. All strategies tracked by the index—save one, fixed-income—were also down in June, and all but four and in the red for the first half.

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Commodity trading advisors were hardest-hit in June, losing 1.69% (down 2.02% year-to-date). All other strategies suffered more modest losses, with commodities funds shedding 0.84% (down 2.65% YTD), foreign exchange down 0.69% (down 0.07% YTD), equity market-neutral down 0.51% (down 1.5% YTD) and event-driven down 0.47% (down 0.57% YTD). Some strategies were barely down at all: Multi-strategy funds lost just 0.07% on the month (up 0.46% YTD), emerging markets funds 0.06% (up 0.19% YTD), long/short equity funds 0.04% (down 0.61% YTD) and macro funds 0.02% (down 0.15% YTD).

Fixed-income funds were up 0.3% in June and are up 2% on the year. UCITS funds of funds lost 0.77% last month and are down 2.39% on the year.

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A UCITS is a mutual fund based in the European Union. UCITS stands for “Undertakings for  Collective Investment in Transferable Securities” and  UCITS funds can be sold to any investor within the  European Union under a harmonised regulatory regime
under UCITS I,  derivatives could only be used for hedging and EPM (i.e.
to reduce risk or cost, or to replicate a position that could otherwise be achieved through investing in the underlying asset).

A regulatory update introduced in 2003 UCITS III, the new regulations allow UCITS to
use derivatives for investment purposes, using exchange traded or over-the-counter (“OTC”) instruments, with some limitations. The underlying of a derivative must be:
• an eligible asset of the type mentioned above
• interest rates
• foreign exchange rates and currencies
• financial indices (e.g. S&P 500).

Physical short selling is not permitted. However, the same economic effect can be achieved and is allowed through the use of derivatives such as Contracts for Difference (“CFDs”).

Forex Magnates wrote a detailed report on CFD’s (available in the Q1 2012 quarterly report) and how FX brokers can benefit from expanding their instrument portfolio. UCITS are a key target market for CFD brokers.

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