Luxembourg could introduce a new type of fund vehicle designed to encourage the development of hedge funds and other types of alternative investment before the end of the year, after the government placed draft legislation before parliament this week.
The proposed new fund vehicle, to be known as a Specialised Investor Fund, is aimed at institutional and other sophisticated investors, and would not require prior approval by the country's regulator, the Financial Sector Supervisory Commission (CSSF).
The introduction of the fund legislation follows a surge in the assets of single manager hedge funds domiciled and/or administered in the Grand Duchy. According to Michael Ferguson, a partner with Ernst & Young and a member of the hedge fund committee of the Luxembourg Fund Industry Association (Alfi), the number of hedge fund portfolios administered grew to around 400 at the end of June, up from 239 a year earlier, while assets under administration grew 126 per cent from USD 27bn to USD 64bn.
The country's fund of hedge funds sector enjoyed more measured but still substantial growth, from 863 portfolios with assets of USD 78bn to some 1,000 portfolios and assets of around USD 100bn. Ferguson says this year-on-year growth of 30 per cent means Luxembourg now administers approximately 13 per cent of all fund of hedge funds assets worldwide.
The legislation now before parliament would allow a promoter to launch its fund and place investments with the shareholders. The prospects and other documentation would have to be submitted to the Financial Sector Supervisory Commission (CSSF) within a month of the launch. The primary regulatory requirement would be that the fund's directors were fit and proper persons with the skill and experience necessary to run the fund according to its declared strategy.
According to Claude Kremer, partner and head of investment management at leading funds law firm Arendt & Medernach and chairman of Alfi's legal committee, the draft legislation makes the new funds available to 'well-informed investors'.
'This is an institutional or professional investor, or private individuals who must declare that they are qualified investors,' says Kremer. 'They must either invest a minimum subscription of EUR 125,000, or alternatively a bank can declare on behalf of the investor that they are sufficiently well informed and that the investment is suitable for them.'
Kremer says the legislation is very broad, allowing Specialised Investor Funds to be used for any type of strategy or asset class, but the clear opportunities are for hedge funds, private equity and property funds. Funds can either take the form of a contractual fund (Fonds Commun de Placement) or an investment company, which can be open- or closed-ended.
The draft legislation retains the rule that Luxembourg funds must use a custodian based within the country. But according to Claude Niedner, a colleague of Kremer at Arendt & Medernach, this will not in practice have a negative impact on hedge funds.
'The custodian is no longer responsible for supervising the safekeeping of the assets, but simply has to monitor where the assets are being held, typically by the prime broker,' says Niedner. 'The custodian simply has to certify that the appointed prime broker is suitable to carry out this responsibility.'