In a further indication of policy orientation at European level that is seeking to limit the instruments that UCITS funds may invest in, on 20 November 2012, the European Securities and Markets Authority ("ESMA") published a formal opinion on its interpretation of Article 50(2)(a) of the UCITS Directive (Directive 2009/65/EC) (the so-called “trash ratio”) which permits UCITS to invest up to 10% of its net assets in transferable securities and money market instruments, other than those eligible assets referred to in Article 50(1).

The Opinion arises from the fact that “questions have emerged about the correct interpretation of this Article and, in particular, whether the derogation…applies to units or shares of collective investment undertakings.

”A number of national regulators, including the Central Bank of Ireland and the CSSF in Luxembourg, have interpreted Article 50(2)(a) as permitting UCITS to invest in unregulated investment funds, including hedge funds, provided the investment complies with the eligibility criteria for UCITS, which is understood as meaning hedge funds that redeem units at the request of unit holders and operate on the principle of risk spreading.