17 July 2007

CESR guidelines on classification of hedge fund indices under UCITS Directive

CESR publishes its final Level 3 guidelines on the classification of hedge fund indices as financial indices for the purposes of the UCITS Directive. CESR considers that in order to fall under the classification of a “financial index” as referred to by the UCITS Directive, hedge fund indices must comply with the criteria applicable to common financial indices set out in Article 9 of Directive as regards the degree of diversification, the market to which they refer, and the way they are published.

Hedge fund indices will also have to fulfil additional requirements as regards to the methodology of the index and information disclosure. The selection of components to be included in the index has to be made on the basis of predetermined rules and objective criteria.

Furthermore, it must not be influenced by any payments made to the provider, and the methodology has to ban any “backfilling practice”. In addition, the guidelines require the UCITS to perform an additional “due diligence” process before deciding to invest in hedge fund indices. In particular, in assessing the quality of the index, the UCITS must take into account the following factors:

the comprehensiveness of the index methodology,

the availability of information about the index, and

matters relating to the treatment of index components.

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