Guide to ADGM Hedge Funds - 10 Leaves

  • 03-06-2020

The ADGM is an upcoming international financial centre in the MENA region for business and fintech. The quality of ADGM’s independent regulator, the prevailing common law framework, excellent infrastructure and tax efficiencies make it the perfect base to take advantage of the rapidly growing demand for financial and business services in Abu Dhabi and the greater MENA region.

 

 

Why setup an investment fund in the ADGM?

The ADGM is an upcoming financial hub in the region. Besides offering a wide range of financial service activities, the centre also provides an integrated environment and excellent infrastructure facilities.

The Financial Services Regulatory Authority, or FSRA, acts as the independent regulator of fund managers and investment funds setup in the ADGM, which provides a high degree of comfort to individual and professional investors. The ADGM offers both Domestic Fund Manager and External Fund Manager licenses, both of which allow for the management of Public, Exempt and Qualified Investor Funds. The ADGM Registration Authority (RA) offers multiple fund structures, included open-ended and closed ended investment companies, and GP-LP structures.

With ADGM Funds, Fund Managers can target the GCC market, and the wider MENASA region, taking advantage of the numerous Double Taxation Avoidance Treaties that the UAE has in place. Fund Managers who wish to specifically target the Abu Dhabi sovereign wealth funds, and family offices, will find the ADGM an attractive destination for the purpose. Zero-rate personal and corporate tax also make the  ADGM an attractive destination to setup and manage investment funds.

You can read more about ADGM Investment Funds here:

Specific Advantages:

Here are some specific advantages of establishing in the Abu Dhabi Global Market:

LEGAL AND REGULATORY FRAMEWORK:

  • Legal framework supports cross-border activities
  • 100% foreign ownership permitted
  • No restriction on foreign talent or employees
  • No restrictions on capital repatriation

TAX BENEFITS:

  • Zero tax for 50 years on profits, capital or assets from 2004
  • Zero tax on employee income

COUNTERPARTY CONFIDENCE:

  • Well regarded, independent regulator
  • Independent, English-speaking, common law judicial system
  • Distinct from the UAE legal system
  • Risk-based regulatory approach

DIVERSE ECOSYSTEM:

  • Central to regional deal making
  • High concentration of international firms, investment funds, wealth management firms, banks, and financial institutions
  • World-class regional and international law and auditing firms, and other professional services
  • A growing fund domicile in the region

GEOGRAPHIC EPICENTRE:

  • Management offices, holding companies and family offices are located closer to the assets they own or manage
  • The Middle East, Africa and South Asia (MEASA) is increasingly the centre of gravity for the global economy
  • The UAE plays a central role in the growing South-South trade, principally between Asia and Africa
  • Well-positioned to harness the potential of emerging markets.

What is a Hedge Fund?

Hedge funds got their name from investors in funds holding both long and short positions, to ensure that they made a profit despite market fluctuations. This practice is called hedging.

Hedge funds have moved on to many different kinds of structures with different assets and securities, and nowadays mean that the fund manager uses a combination of complex investment strategies and leverage to aim for higher returns. Contrast that to a equity fund or a property fund, which, as the name suggests, invests in listed equities or property assets.

 

As the first money manager to combine short selling, the use of leverage shared risk through a partnership with other investors and a compensation system based on investment performance, Alfred Winslow Jones earned his place in investing history as the father of the hedge fund.

 

Typical hedge funds have some or all of the following characteristics:

  • They are available to professional investors only;
  • They have a wide range of investments;
  • They employ leverage;
  • They have a 2/20 structure, with 2% management fee and 20% performance fee.

What is a 2/20 structure?

This represents the fixed management fee of 2%, and a variable fee of 20% based on performance. For example, if a hedge fund manager set up a professional fund with an AUM of US$10 million, the fund manager would get 2% of that amount ($200,000) as a fixed fee for managing the portfolio. In addition, if the fund did well and the AUM got doubled to US$20 million, the fund manager would get a performance fee of US$ 2 million, based on the US$ 10 million additional gains generated.

Who is a Professional Client?

The ADGM has a detailed definition of Professional Client, which includes service-based, assessed and deemed professional clients. While specifics are best checked at the FSRA website (or you can contact us for more details), in general, assessed professional clients are subject to the net asset test of US$ 500,000.

Types of Funds:

 An ADGM Hedge fund can be an Exempt Fund or a Qualified Investor Fund.

Exempt Funds:

Exempt Funds are open only to Professional Clients (as defined by the ADGM). The other features of an Exempt Fund are:

  • Minimum subscription of US$ 50,000;
  • Units are offered to persons only by way of a Private Placement.

Qualified Investor Funds:

Qualified Investor Funds are open only to Professional Clients (as defined by the ADGM). The other features of a QIF are:

 

  • Minimum subscription of US$ 500,000;
  • Units are offered to persons only by way of a Private Placement.

Setting up a fund structure in the ADGM:

Setting up a fund in the ADGM requires either a) setting up a Domestic Fund Manager or b) licensing an existing fund manager in a recognized jurisdiction, to act as the External Fund Manager of the ADGM fund. Read this article to know more about the licensing process and associated costs.

A hedge fund in the ADGM will also need to appoint some service providers to carry out critical functions, such as fund administration and audits. Read this article on the different services associated with maintaining a hedge fund in the ADGM. 

Did you know that a Private Placement Memorandum, or PPM, is the key document for ADGM Investment funds? The PPM details material information on the fund and serves as the backbone of the legal documentation involved. Read this article to know more about the documents required for setting up a hedge fund in the ADGM.

Contact us to discuss your fund requirements today!

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