Carne has published a handbook on how the European Savings Directive will impact the funds industry and in particular hedge funds and hedge fund of funds.
"Many Hedge managers have taken a view to date that the directive does not impact any hedge funds. This is not true," said John Donohoe, CEO of the London and Dublin-based independent funds consulting firm. "Some hedge funds domiciled in countries such as Bermuda and the Bahamas will be directly affected while some of those in the likes of Dublin or Cayman may be indirectly affected.
"Hedge Funds domiciled outside the Relevant Territories, for example Bermuda or Bahamas, do not appear to benefit from the exemption of UCITS type funds from the directive. As a result, if these funds are held by European taxable individuals and involve a cross border payment, eg a redemption payment, by a paying agent within the Relevant Territories, then such a payment could fall within the reporting or for withholding tax requirements if the fund breaches the various asset tests.
"There are other complications for Hedge Funds. For example, if the above are hedge fund of funds they may require asset tests from the underlying hedge funds regardless of underlying funds domicile. As a result, hedge funds domiciled in the likes of Cayman or Dublin may need to supply asset tests even though they may be outside the scope of the directive.
"Asset tests may be very complex especially where leverage or derivatives are used long/short funds can hold considerable cash thereby increasing the asset test. Many hedge funds are administered in Dublin or Luxembourg resulting in the paying agent being based within the EU.
"It is imperative managers understand their ultimate investor base and be able to look through nominee accounts where possible to determine any impacts. Where a fund may be directly or indirectly impacted the manager should determine the need for investor communication and ensure full compliance with the directive. The directive is due to come into force on 1 July 2005."