Hedge Funds in the DIFC | DIFC Hedge Funds - 10 Leaves

  • 20-03-2020
DIFC is one of the world’s top eight onshore financial centers and offers a secure and efficient platform for businesses and financial institutions to reach into and out of the emerging markets of the region. The quality and independence of DIFC’s 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 the MENASA region.

 

DIFC fills the time-zone gap for a global financial centre between the leading financial centres of London and New York in the West and Hong Kong and Tokyo in the East.

Why setup a DIFC hedge fund?

The DIFC is a leading financial hub in the region. Besides offering a wide range of financial service activities, the centre also provides an integrated environment and world-class standard of living. It is well regarded in the international community as well.

You can read more about DIFC Investment Funds here:

https://10leaves.ae/publications/difc/investment-funds-in-the-difc

Specific Advantages:

Here are some specific advantages of establishing in the Dubai International Financial Centre:

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:

  • Highly 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.
  • The largest 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.
  • Dubai 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.

What is the DFSA Hedge Fund Code of Practice?

The DFSA implemented a code of practice for Hedge Fund Managers setup in the DIFC. This code serves as a standard for good practice and aim to address the risks inherent in the operations of DIFC hedge funds. The nine principles set out in the code cover skills and resources, investment strategies, systems and controls and ethical practices.

Setting up a fund structure in the DIFC:

Setting up a fund in the DIFC 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 DIFC fund. Read this article to know more about the licensing process and associated costs.

A hedge fund in the DIFC 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 DIFC. 

Did you know that a Private Placement Memorandum, or PPM, is the key document for DIFC 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 DIFC.

 

Our services include assistance in:
1. Reviewing the fund structure and advice on the applicable regulatory framework;
2. Preparation of the Regulatory Business Plan and comprehensive financial projections;
3. Preparation of all policies, processes and manuals required;
4. Provision of Outsourced Compliance Officer and Outsourced Finance Officer services;
5. Finalising the legal structure, including holding company setup and customisation of Memorandums;
6. Preparation of complete fund documentation, including Private Placement Memorandums, Subscription Agreements and Fund Constitutions;
7. Assistance in finalisation of all service providers, including Fund Administrators, External and Internal Auditors; and
8. Finalisation of leased space, bank account opening and obtaining Financial Services Permissions.

Contact us to discuss your fund requirements today!

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