What is a hedge fund?
A hedge fund follows an alternative investment strategy by trading in relatively liquid assets and making use of more complex trading, portfolio-construction and risk management techniques to improve performance. Hedge funds are often managed more aggressively using short selling, leverage and derivatives to generate higher returns.
Why set up hedge fund in Luxembourg?
Luxembourg is a globally leading domicile for investment funds, the second largest investment fund centre in the world after the United States and the largest fund domicile in Europe with currently more than EUR 4,7 trillion of assets under management.
As of October 2019, 16.5% of global hedge funds were domiciled in Luxembourg and 48% of UCITS with a hedge fund strategy were domiciled in Luxembourg. While the global market share of most other hedge fund domiciles has decreased in the last four years, Luxembourg was able to improve its global market share significantly.
This maybe also due to the fact, that Luxembourg offers a toolbox of solutions to establish hedge funds, offering promoters a high degree of flexibility for their investments. As an EU domicile, hedge funds established in Luxembourg can be more easily distributed within the EU on the basis of existing passporting rights for EU funds.
The key advantages of Luxembourg as a domicile for hedge funds are:
1. One Stop Solution:
Setting up a hedge fund with an EU passport, using leading service providers and outsourcing certain functions back to other countries. Luxembourg has the flexibility to offer a one stop solution for operating and distributing investment funds, as well as deploying the funds in an efficient and structured manner.
2. Choice of vehicles:
Fund promoters have the choice between unregulated or regulated funds and vehicles: Depending on investor demands, they can either opt for:
(i.)an unregulated fund or vehicle that is quickly set up and needs no approval by the Luxembourg Financial Supervisory Authority (Commission de Surveillance du Secteur Financier or CSSF),
(ii.)a fund that is supervised by the CSSF, or
(iii.)a fund that is not supervised but has appointed a supervised Alternative Investment Fund Manager (AIFM).
3. Global brand:
Investors are comfortable with Luxembourg, as it has the following advantages for investors:
(i.)Professional and globally recognized fund service providers are established in Luxembourg,
(ii.)depository/custodian is in Luxembourg, if within the scope of the AIFMD,
(iii.)Luxembourg is a reputable fund jurisdiction with established legal frameworks for funds.
4. EU passport:
The hedge fund could be distributed on the basis of an EU passport, such as the UCITS or AIFM passport.
Which investment funds could be suitable for a hedge funds?
Luxembourg offers a range of fund solutions, ranging from supervised to non-supervised. These funds are typically used for hedge funds in Luxembourg, due their access to an EU passport and the possibility to establish them as umbrella structures.
1. UCITS (Undertaking for Collective Investment in Transferable Securities) is the leading globally distributed investment fund product. UCITS are an increasingly popular fund type for hedge funds. Hedge funds structured under the UCITS legal framework are more appealing to institutional investors, as they provide for greater transparency and appropriate disclosure of investments, as well as limited leverage and attractive liquidity terms.
Features of the UCITS are the following:
(i.)highly regulated retail product supervised by the CSSF;
(ii.)strict rules on investment and diversification;
(iii.)access to UCITS passport, meaning that once authorised by the CSSF in Luxembourg, they can be distributed to the public in all other EU Member States, on the basis of a formalized procedure; and
(iv.)many countries around the world recognize the UCITS standard, making this the globally leading fund type distributed around the world.
2. SIF (Specialised Investment Fund) is a flexible commonly used fund type. The SIF is the most popular regulated fund type for hedge funds, due to the combination of flexibility and supervisory oversight. The features of a SIF are:
(i.)supervised by the CSSF;
(ii.)reserved for well-informed and professional investors;
(iii.)requires a low level of diversification;
(iv.)can be set up as an umbrella fund; and
(v.)may also qualify for the AIFMD passport, provided the conditions are met.
3. Limited Partnership (CLP/SLP) is a highly flexible fund vehicle that has been very successful in the last years. It allows hedge fund promoters to set up a hedge fund similar to hedge funds operating as an Anglo-Saxon partnership. The features o limited partnerships (CLP/SLP) are:
(ii.)contractual flexibility: The limited partnership agreement (LPA) is the main document organizing the functioning of the partnership, which gives the fund the flexibility to organize the structure of the fund,
(iii.)this fund type is not restricted to any asset type and not subject to any risk diversification rules.
4. RAIF (Reserved Alternative Investment Fund) has been a highly successful fund vehicle, since its introduction in 2016. The RAIF allows for a significantly reduced time-to-market, with the option to transform later to a supervised fund, such as a SIF or SICAR, if required. The features of the RAIF are:
(i.)can be structurally similar to the SIF regime without being subject to direct supervision by the CSSF;
(ii.)can also be set up as an umbrella structure;
(iii.)the RAIF has to appoint an AIFM (Alternative Investment Manager), which itself is regulated by the CSSF, but can therefore benefit from the AIFMD passport.
How long does it take to set up a hedge fund in Luxembourg?
The time to set-up depends on whether the vehicle is a supervised or non-supervised fund vehicle. Whilst a non-supervised investment vehicle can be set up within 2 weeks, a supervised vehicle can be established with 2-3 months, depending on the complexity of the fund structure and its investment policy.
How much does it cost to establish a hedge fund?
As Luxembourg offers a toolbox of different solutions, the establishment cost greatly varies between the solution chosen and the service providers used to service the fund. Setting up a fund which is not supervised, is less costly than a supervised fund targeted for retail clients.
Apart from setting up your own hedge fund, you can also rent a sub-fund of an existing umbrella structure.
For more information please do contact us.