In theory at least, there is little to prevent the
development of a flourishing universe of UCITS-compliant funds
of funds. Although a UCITS itself is prohibited from investing
directly into unregulated hedge funds, investment in other
UCITS, closed-end funds, managed accounts and indices are all
permissible, as long as they in turn invest in eligible
In the formative stages of the market for UCITS III
products, it was chiefly the constraints on their investment
freedoms that limited the growth potential of funds of UCITS
III funds which in turn would themselves be UCITS-compliant.
There were, however, other practical bars to the development of
UCITS-compliant funds of UCITS, the most intractable being the
absence of meaningful performance track records for UCITS III
The result was that by the end of 2009, UCITS funds of UCITS
– or UCITS-squared – remained relatively thin
on the ground. In a survey published...