16/6/2009
By Sophie Baker
Proposals by the EU to control the risk of UCITS funds could leave them more risky than hedge funds, as they will not protect investors from the risk of a huge loss of investment value, says EM Applications.
The proposals were made in a consultation paper by the Committee of European Securities Regulators (CESR), which suggested new technical guidance for the risk measurement of UCITS funds.
The notion of "relative VaR" lies at the heart of the problem, EM Applications says, which would render a UCITS fund twice as risky as a technology fund. Instead, EM Applications recommends that a more conservative measure, such as "active VaR", be employed.
The investment risk solutions supplier says the consultation paper and suggestions are "as though the EU has got involved in setting road speed limits and, taking account of improvements in car safety and the desire for fewer accidents they've come up with new rules so that the maximum speed limit is 50mph or twice what it used to be".
The CESR paper also, EM Applications says, represents a U-turn in terms of the historical period that may be used for VaR calculations. The original directive stated "no more than one year", and now it says it is to be "at least one year".
Peter Ainsworth, managing director of EM Applications, said: "While the CESR paper makes some good technical points, it seems more focussed on being technically correct than on protecting investors. Allowing UCITS funds to be significantly more risky than hedge funds puts the UCITS brand at risk and is bad for investors. Relative VaR needs to be ditched and replaced with a more conservative measure."
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