For a UCITS Scheme what types of transactions are consider as hedging strategies under the latest ESMA guidelines

Monday July 9 2012

1. An Interest Rate Swap or a short position (within the same currency and interest rate duration) on Bond Futures to reduce the interest risk on a corporate bond – permissible under paragraph 33(a) of the CSER Guidelines.

2. A Credit Default Swap purchases to reduce the credit risk of a corporate or government bond, where the CDS relates to the same issuer. If it does not relate to the same issuer it is not considered a hedging transaction.

3. Where a UCITS invests into other funds as part of its investment policy, per BOX 8 of the CESR Guidelines the UCITS can undertake hedging on two conditions, a) The management company of the investing UCITS has full knowledge of the underlying investments of the target funds and b) if the hedging arrangements relate to the same asset class.