Hedge Funds in Luxembourg - 10 Leaves

  • 19-03-2021

A GLOBAL CENTRE FOR INVESTMENT FUNDS:

Luxembourg is a global centre for investment funds, the second largest fund jurisdiction in the world, after the United States. It is the largest centre for funds in Europe, with over Euro 4.5 trillion in cumulative assets under management in supervised funds alone.

Why setup an investment fund in Luxembourg?

The country is:

  • A founding member of the EU.
  • Politically stable.
  • Financially stable.
  • AAA-rated.

It has:

  • Access to over 500 million EU residents.
  • Reliable investment regulations.
  • Over 4,200 supervised investment vehicles with around 14,500 sub-funds.
  • A competitive framework for passporting of funds within the EU.
  • Luxembourg funds are sold in more than 70 countries and is the leading jurisdiction for fund distribution.
  • A responsive and globally recognized financial regulator.

It offers:

  • A wide range of supervised and non-supervised investment funds.
  • UCITS and AIFs.
  • Umbrella funds.
  • Non-supervised funds.

Tax benefits:

  • Depending on the need of investors, Luxembourg offers tax exempt, tax neutral or taxable investment vehicles,
  • Some exemptions for VAT payments;
  • Funds may access Double Taxation Avoidance Treaty benefits or establish SPVs that would have access.

Luxembourg funds and the GCC:

Luxembourg is a jurisdiction of choice for investors based in the GCC. While the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) also offer fund structures, Luxembourg funds have more diverse options, including SLPs – that can be unsupervised and allow for greater flexibility for lower AUMs.

Luxembourg is an excellent jurisdiction for startup funds due to lower setup and maintenance costs, in some cases, as low as 35% of the costs in similar onshore jurisdictions in the GCC. They can be established quickly, are more flexible and can easily be upgraded to supervised or passportable funds once higher AUMs are achieved.

Luxembourg funds can also be managed from the DIFC (and ADGM), by setting up a restricted fund manager. This allows for greater comfort to prospective investors, besides opening an option for directly marketing and passporting the fund within the UAE.

Most large banks and investment managers in the UAE and the GCC have Luxembourg fund options. In fact, Luxembourg domiciled investment funds dominate among foreign funds sold in the GCC.

United Arab Emirates – 64% of foreign funds are Luxembourg funds

Saudi Arabia – 50%

Kuwait – 75%

Bahrain – 75%

Oman – 99%

Qatar – 98%

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 onto 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:

1. They are available to professional investors only;

2. They have a wide range of investments;

3. They employ leverage;

4. 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.

Why set up a hedge fund in Luxembourg?

Luxembourg is a leading jurisdiction for investment funds and the second largest investment fund centre in the world after the United States. It is the largest fund jurisdiction in the European Union, with more than Euro five trillion of assets under management.

As of December 2020, over 17% of global hedge funds were domiciled in Luxembourg and close to 50% of UCITS with a hedge fund strategy were setup in Luxembourg.

The success of hedge fund establishment in Luxembourg is due to the fact that the centre offers multiple solutions to establish hedge funds, offering fund managers a high degree of flexibility for their investments. As an EU domicile, hedge funds established in Luxembourg can be more easily distributed within the European Union on the basis of existing passporting rights for EU funds.

What are the key advantages of setting up a hedge fund in Luxembourg?

The first big advantage is choice. Fund managers can choose the level of supervision they require, depending on the kind of clients that the fund will market itself to. Accordingly, hedge funds can be unsupervised (such as SLPs), supervised (such as SIFs) or attach themselves with a supervised AIFM (such as RAIFs).

A Luxembourg structure also offers comfort to investors, given the good reputation of the jurisdiction, the enhanced protections offered to investors and the existing network of globally-recognised service providers.

Distribution options are the next major advantage. A Luxembourg hedge fund could be passported on the basis of the AIFMD framework, once it appoints an AIFM.

What structures are available for forming hedge funds in Luxembourg?

Well, there are a few, as below.

  1. UCITS: (Undertaking for Collective Investment in Transferable Securities). UCITS are the most distributed investment fund product globally. They are well-regulated by the CSSF, since they can be offered to retail investors.

UCITS are subject to strict diversification rules, and can only invest in certain asset classes, such as listed securities, bonds, index components and assimilated assets.

They benefit from the EU Passport and can be distributed through the European Union.

  1. Specialised Investment Fund (SIF): These are very flexible fund structures, and available to qualified investors only. SIFs are supervised by the CSSF, require a lower level of diversification, and can be set up as umbrella funds as well.

SIFs can also opt for the EU Passport, after meeting certain conditions.

  1. SICAR: (Investment Company in Risk Capital). This is also a supervised fund, and must invest in risk-bearing assets.

A SICAR is not subject to any diversification rules, is restricted to qualified investors, has access to double-tax avoidance treaties and can qualify for the AIFMD passport, provided the conditions are met.

  1. RAIF, or Reserved Alternative Investment Fund. RAIFs were introduced in 2016 and have been very successful.

They are faster to setup, and flexible enough, and they can be transformed into SIF or SICAR, if required.

In fact, they are structurally similar to the Luxembourg SIF and SICAR, but are not directly supervised by the CSSF. Instead, a RAIF has to appoint an AIFM, which in turn is regulated by the CSSF. This allows the RAIF to benefit from the AIFMD passport and be marketed throughout the European Union.

  1. Limited Partnerships (LPs): These include CLPs and SLPs, and are highly flexible hedge funds.

LPs are not supervised, are similar to partnerships in Common Law jurisdictions, allow for contractual flexibility through Limited Partnership Agreements, and are not restricted to any asset type and not subject to any risk diversification rules.

How fast can the hedge fund be set up?

The time to setup depends on whether the Luxembourg hedge fund or compartment is a supervised or non-supervised fund. A non-supervised fund can be set up within 2 weeks, while a supervised structure can take around two months, depending on the complexity of the structure and the time it takes to get approved by the Luxembourg regulator.

How can we at 10 Leaves help you?

We provide turnkey services for Luxembourg structures:

From initial consulting, to assistance in authorisations, to assistance in preparation of the legal documentation, 10 Leaves helps you navigate the legal framework in Luxembourg and submit an application that is comprehensive, complete and compliant.

Our services include assistance in:

1. Reviewing the business model and advice on the applicable regulatory framework;

2. Preparation of all the required documentation, including Private Placement Memorandums and agreements;

3. Provision of compliance and bookkeeping services; and

4. Finalisation of registered space and bank account opening.

5. In fact, we can do all this without you having to visit Luxembourg!

Get in touch! to know more about hedge funds in luxembourg.

For More Information, View Our Luxembourg Brochure

 

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