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 assets.
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 products.
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...