SIFs anticipate key market trends
As the world's second largest fund centre with more than EUR2trn in assets, Luxembourg is best known for retail products. However, the past five years have seen Luxembourg become established as a domicile and administration centre for hedge funds as well as real estate and private equity funds. The hedge fund administration industry alone now services more than EUR220bn in hedge fund assets, and has been growing at more than 75 per cent year on year.
To meet demand from institutional, private and high net worth investors for a lightly regulated onshore legal structure, particularly for alternative investment products, the Luxembourg authorities established the Specialised Investment Fund (SIF) earlier this year, replacing the 1991 Institutional Investment Fund law.
SIFs may be established as common funds or investment companies (private or public limited companies or partnerships), in each case as an umbrella structure with multiple sub-funds that may pursue different investment strategies. In a ground-breaking provision designed to boost speed to market, the fund may be launched (including raising and investment of capital) prior to approval by the Financial Sector Supervision Commission, as long as the application is submitted within one month of launch.
SIFs can be offered to an expanded range of 'informed investors', comprising both institutions and individuals, who meet certain requirements, which may include a minimum investment of EUR125,000. The legislation abolishes the qualification requirements previously imposed on fund promoters and investment advisors, including minimum capital criteria, which in the past discouraged start-up promoters and investment managers from launching alternative products in Luxembourg.
The management of the SIF - the board of directors, partners, and managers, depending on the legal structure - do not have to be resident in Luxembourg, but must be approved by the CSSF and demonstrate adequate experience in the fund's strategies. SIFs must simply comply with broad investment risk diversification requirements - general quantitative investment limits but no limitations on leverage. There are no restrictions on the appointment of prime brokers.
SIFs are not subject to tax on profits or capital gains. They may also benefit from many of Luxembourg's tax treaties to eliminate or reduce withholding taxes on foreign income or capital gains. This gives Luxembourg an advantage over certain offshore domiciles where withholding tax can be a significant drag on performance. SIFs do not have to publish their NAV and may show a condensed portfolio statement of investments in its annual report.
As convergence grows between the three sub-sectors of the alternative asset management industry, as well as between traditional and some hedge fund strategies, SIFs can accommodate multiple asset classes, such as hedge funds, real estate and private equity, within a single legal structure.
Luxembourg has a history of anticipating market trends and delivering practical solutions. For example, it has played a leading role in the creation of sophisticated Ucits III funds, remains proactive in signing double taxation treaties, and now has implemented the SIF, all developments that support the growth of a thriving financial centre.
Over the first six months of the new regime, SIF approvals by the CSSF have averaged one per working day, a pace that may speed up further as promoters, advisers and regulators gain experience with the post-ante authorisation process. The message is clear: the SIF is meeting demand from investors and advisors for a lightly regulated and flexible onshore vehicle.
Michael Ferguson is a partner and head of asset management with Ernst & Young in Luxembourg
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