Glossary

''The introduction of the UCITS Directive (85/611/EEC) in 1985 provided a common regulatory framework (including risk diversification limits) and a ‘passport’ for the ‘cross-border’ distribution of mutual funds. Since then, the growing market share of hedge funds as well as the increased diversity of tailor-made derivative products, have outdated the UCITS regulation and has led to an increasing gap between the traditional long-only funds (UCITS) and the hedge fund world.

What’s new under UCITS 3?By enlarging the use of derivatives, especially OTC-derivatives, the borders between benchmark driven long-only products and funds with a similar risk-return profile to hedge funds become increasingly blurred. In order to properly accommodate this evolution, the regulator has enhanced the risk spreading rules and introduced an overall risk management requirement. ‘Value-at-risk’ (‘VaR’) was recommended by the EU Commission as the preferred indicator to measure the ‘risk exposure’ and is the default risk indicator for ‘sophisticated’ UCITS throughout Europe. VaR indicates the maximum potential loss for a given investment over a certain period of time with a specified probability (level of confidence) under “normal” market conditions. The legal limit of VaR is set in absolute terms (% of NAV) or relative terms (compared to VaR of a benchmark), largely depending on the country of domicile of the UCITS.In general, we can distinguish three types of VaR: Parametrical, Historical and Monte-Carlo.'' © John Parkhouse, Partner, and Olivier Carré, Director Business review, 22 mars 2007.

The underlying of a structured product or option can be any asset class(equity index, stock basket, debtinstrument, interest rate, commodity or a combination of these) that is used to construct the product and whose performance is a key determinant of the payout. In some products, the underlying may be a basket of 20 stocks, but the redemption basket that is used to calculate the maturity payout may comprise only 10 of those stocks.