Digital Assets Report


Like this article?

Sign up to our free newsletter

An ideal jurisdiction for start-up hedge fund managers

Related Topics

Over the years, Malta has been experiencing strong and consistent growth in its financial services industry and despite its size, is fast becoming the jurisdiction of choice. Thanks to its innovative fund structures within the alternative space as well as those targeting sub-threshold asset managers, the cost competitiveness and the regulator’s (the Malta Financial Services Authority) charter that ensures regulatory timeline efficiencies, Malta is now competing with international leaders in this space. 

What renders Malta an excellent jurisdiction for relocation and domiciliation is its ability to strike a balance between two traditionally opposing forces – the need for robust regulation and compliance, and the dynamic, ever-changing needs of the industry for efficiency, flexibility and pragmatism. Indeed, Malta allows fund promoters and investors to operate with peace of mind in a stable and resilient economy. Recent economic success has set Malta up as the commercial hub of the Mediterranean, where Malta is today supported by an economy that thrives on corporate services, tourism, education, ICT, pharmaceuticals, aviation and the maritime industry.

Besides vaunting cost-effective set-up and operational costs, Malta has an advantageous tax regime, in full conformity with the EU rules, which allows companies to benefit from the full imputation system, whereby a tax refund system applies for company’s shareholders who are not resident in Malta, which refund reduces the effective rate of tax to 5%. Asset management companies run by foreign interests in Malta benefit from such a regime. 

Over the last few years, Malta has firmly established itself as the ideal jurisdiction for hedge funds and is no longer considered as an emerging funds domicile. It offers fund promoters a range of sophisticated investment vehicles for a myriad of investment strategies. Undoubtedly, Malta’s variety in fund structures has been instrumental in attracting start-up managers as well as full scope Alternative Investment Fund Managers (AIFMs). Despite Malta joining the European Union (EU) in 2004, and the introduction of the AIFM Directive in 2014 (AIFMD), Malta has still retained its popular Professional Investor Funds (PIFs) regime, which caters for  a niche market of fund managers who do not exceed €100 million in Assets Under Management.  The PIF is considered as the start-up fund model of choice, and whilst fully compliant with EU law, it provides for an ideal alternative to an AIFMD-compliant Alternative Investment Fund (AIF); it therefore does not fall within the scope of the AIFMD, thus availing itself of flexibilities and lighter regulatory burden. PIFs may also be structured as a self-managed funds which satisfies the de-minimis thresholds. 

A PIF, is a type of collective investment scheme intended for particular categories of high-net-worth investors who are able to meet certain minimum investment requirements. The licensing and supervision of PIFs is carried out by the MFSA, but since PIFs can only be offered to investors who have adequate expertise and knowledge to understand the risks involved, these funds are regulated in a more lenient manner, with no investment restrictions and no diversification requirements. This allows PIFs to adopt more innovative investment strategies. It is also possible to have PIFs structured as self-managed funds; additionally, a custodian is not required if the fund has adequate safekeeping arrangements in place. Regulatory costs are relatively cheaper when compared to other structures, and when compared to costs incurred in other jurisdictions.

In its ongoing drive to be innovative in the alternative space, in the coming months, Malta will also introduce the Notified Professional Investor Funds (NPIFs) Regime. The NPIFs solution is a fast-track process for below threshold alternative funds/fund managers. Following the success with the Notified Alternative Investment Funds regime (NAIFs), the MFSA is in the final stages of introducing this new proposed framework. Similar to NAIFs, NPIFs will be subject to a notification process and will not be licensed by the MFSA. Promoters may therefore benefit from lower setup, operational, and regulatory costs, which fully licensed funds currently are subjected to. Furthermore, the NPIF regime acknowledges time-to-market pressures experienced within the fund industry, since the MFSA will include a NPIF in the List of NPIFs held in good standing by the regulator within ten working days from the filing of a complete suite of notification documentation.

NPIFs, will be available to institutional and high net worth investors, and may be managed by locally licensed de minimis AIFMs, EU/EEA de minimis AIFMs and third-country AIFMs from reputable jurisdictions. While lending activities are excluded, NPIFs will be allowed to engage in any other investment strategy. With these constant establishment of innovative products, Malta’s asset management industry is becoming increasingly appealing to fund managers and other industrial key players who are intrigued by the time-to-market considerations, allowing them to grasp to every opportunity that may arise. Other recent developments that contributed to the innovative nature of the sector, were the introduction of the aforementioned NAIF regime (fast tracking the launch of passportable AIFs), regulations for funds investing in virtual assets, and the introduction of loan fund rules among others.

During the last few years, as a result of Brexit and other factors, Malta has experienced redomiciliation of fund structures from other domiciles. Indeed, Malta is presenting itself as a conduit to the EU without the need to mobilise entire set ups and disrupting family life of employees of fund management outfits as a result of pitching for fully fledged operations in Malta. Basically, Malta presented three core options for UK asset managers as a solution to reach the EU markets:

  1. Setting up of a satellite operation, for example a full scope AIFM or UCITS manager in Malta. As a minimum, such entities must provide one of the two core functions, i.e., the investment management or the risk management. What Malta has seen is a strong presence of similar entities limiting themselves to the risk management activity, whilst outsourcing the day-to-day investment management to the main base located in London. This meant that the substance in Malta was rather limited and that the core activity remained in the UK
  2. Another option was for these asset managers to exploit the services of a myriad of full scope AIFMs or UCITS managers present in Malta that have boomed over the years. Such entities offer services to third parties wanting to have access to the EU market without the need to set up their own operation locally
  3. A third option is a mid-way solution. Essentially this is about the setting up of a subsidiary licensed operation in Malta, but being hosted at the offices of an existing AIFM or UCITS manager, in terms of office space, physical infrastructure as well as risk management support. This enables entities to have a presence in Malta without the need to go into rentals, employment agreements and the other day-to-day operational challenges.

In conclusion, Malta has become a home to a complete ecosystem of financial services which traditionally comprises pensions, private wealth, credit and financial institutions and insurance. But we definitely cannot ignore the latest arrival – Distributed ledger technologies (DLT) and blockchain. Undoubtedly Malta is way ahead many other countries in exploiting new technologies., Following the roll out of the world’s first holistic regulatory framework for DLT, Malta is being labelled as the blockchain island. Indeed, the government affirmed that it is expecting that the sector will account for 10% of GDP by 2027.

Like this article? Sign up to our free newsletter

Most Popular

Further Reading