It becomes impossible for one to introduce a discussion about UCITS IV, without considering the developments leading up to its establishment. This would include an appreciation of the potential changes that have taken place within the international arena in recent years that have set the tone for future developments.

The Undertakings for Collective Investments in Transferable Securities Directive (“the Directive”), was first introduced in 1985 as UCITS I. This framework was generally aimed at the improvement of the efficiency of the single market by facilitating the free circulation of UCITS within the EU (SGSS, 2011). The envisaged fund would have to comply with a set of common coordinated rules, and in particular those relating to the initial public offering, eligible financial instruments and the division of risks (SGSS, 2011). Certain limits had to be placed on the UCITS authority to investment in order to maintain a satisfactory level of liquidity, diversification and transparency (Anderson, & Bougiatiotis, 2011). These restrictions included limits on the amount a fund can borrow, the proportion of a fund’s assets that could be allocated to a single security or issuer, while restricting derivatives to be used for efficient portfolio management purposes only. The Directives also limited investments to only certain defined ‘transferable securities’. At the outset these rules were highly restrictive, leaving little room for leverage, derivatives or investment in anything other than traditional equities and bonds (Anderson, & Bougiatiotis, 2011).

Industry practice applicable to UCITS directs that funds which were Directive compliant would be deemed “coordinated” for recognition purposes. It follows that these coordinated funds could then market their units in any Member State of the EU on the simple basis of a notification to the State concerned, and therefore without having to seek a new agreement in each of the countries where the units are marketed (SGSS, 2011).

In 2002 the update of the Directive, initially introduced in 1985, resulted in what would be called UCITS III. One key development of the revised directive was to give asset managers a broader scope of eligible assets. However, the European regulator simultaneously increased the requirements on investor protection and asked in particular for an independent risk management function which would limit leverage, counterparty risk and concentration limits (Westbrook, 2013). UCITS, which are regulated by the EU, allow hedge funds to raise money from individual investors. The structure places restrictions on leverage, gives clients details of holdings in a similar way to mutual funds and allows investors to withdraw their money in as little as a day (Westbrook, 2013).

That being said, innovations in product development and the growing complexity of global markets led to concerns that the UCITS rules were too restrictive for many investors, and were becoming a hindrance to the development of a pan-European fund market. Therefore, the original UCITS directive was built upon and enhanced, culminating in the introduction of the UCITS IV rules in July 2011 (Anderson, & Bougiatiotis, 2011). The latest version of this directive is the UCITS IV Directive which officially took effect on 01/07/2011(SGSS, 2011).

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