HFM WEEK H O W T O S T... H E D G E F U N D...

HFMWEEK
S P E C I A L
R E P O R T
HOW TO START A
HEDGE FUND IN
THE EU 2012
DISTRIBUTED WITH HFMWEEK
LEGAL ISSUES
Advice for start-ups in the EU
RECRUITMENT
Making the right hires at the right time
CONSULTANCY
Maintaining investor confidence
FEATURING Dechert // Dillon Eustace // KB Associates // One Ten Associates
// Point Nine // Quant // Zammit & Associates Advocates
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H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
W
ith just over 15 months to go until the Alternative
Investment Fund Managers Directive (AIFMD) is due
to be written into national laws, 22 July 2013, hedge
fund start-ups are coming to terms with the implications.
Intended to offer more stability and enforce greater
transparency to funds’ operations across the European
Community, the Directive’s stipulations may require more
time and financial resources in order to comply with it,
but the resulting opportunities for fund managers may
make it worthwhile if demand from investors increases.
This HFMWeek special report explores the key issues facing European startups and what potential investors will be looking for. Setting up a hedge fund
infrastructure demands a good understanding of both the needs of the business
and those of the investors, and there are many different considerations to address
early on. The COO and compliance department will naturally have an important
role in making sure regulatory approval is obtained. Fund managers will have to
establish a viable business, showing the necessary controls and risk mitigation in
their infrastructure at the same time. As transparency and security become key
requirements, structural solutions such as managed account platforms (MAPs) will
be appealing to investors, and in addition, prime brokerage services will be looking
to assist those start-ups unable to afford the costs required to attract the attention of
the larger European prime brokers.
Ireland continues to be an attractive domicile, in particular due to its Qualifying
Investor Funds (QIFs), which already meet many of the requirements of the AIFMD.
Malta is coping with the increasing number of international businesses setting up
operations there with the Highly Qualified Persons Rules, introduced by the Malta
Government in 2011, which offer a favourable tax rate on employment income.
Therefore, choosing the jurisdiction which best suits a fund manager’s needs
remains as important as ever. Obtaining eligibility for Ucits space will also be
attractive to investors enticed by the prospect of open passporting rights within
the eurozone. Moreover, apart from meeting all the operational and due diligence
requirements, the ability to offer potential investors a unique opportunity one way
or another is just as important.
Richard Weston
REPORT EDITOR
HEDGEFUNDMANAGER
HFMWEEK
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H F M W E E K . CO M 3
CONTENTS
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
06
LEGAL
GERMANY: TRANSPARENT INVESTMENTS
17
08
LEGAL
11
ATTRACTING THE ‘BEST OF BREED’ FOR MALTA’S
FINANCIAL SERVICES INDUSTRY
Andrew Zammit, chief legal officer of CSB Group, gives an outline of
the Highly Qualified Persons Rules, 2011
RECRUITMENT
14
19
HEDGE FUND IN A BOX, EVERYTHING YOU NEED IN
ONE PLACE…
Jerry Lees of Quant explains the important role of a Mini Prime
broker: to get you to market quickly, bypass set-up and regulatory
delays and raise funds
START-UP HEDGE FUNDS
Mush Ali of One Ten Associates explains the different challenges
facing COOs of hedge fund start-ups
4 H F M W E E K . CO M
FLEXIBLE SOLUTIONS
Ambasuthan Jananayagam of Point Nine talks to HFMWeek about
why start-up managers need to be flexible during uncertain times
Achim Pütz of Dechert gives an overview of the benefits of a
managed account platform from the perspective of a German
institutional investor
PRIME BROKERAGE
OPERATIONS
CONSULTANCY
HOW TO MEET INVESTORS’ EXPECTATIONS?
Phillip Chapple of KB Associates discusses some of the demands
of starting a hedge fund infrastructure
LEGAL
21
QUALIFYING INVESTOR FUNDS – THE REGULATED
ALTERNATIVE
Derbhil O’Riordan of Dillon Eustace explains Ireland’s benefits as
a regulated jurisdiction for alternative fund investors and fund
managers
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
GERMANY: TRANSPARENT
INVESTMENTS
ACHIM PÜTZ OF DECHERT GIVES AN OVERVIEW OF THE BENEFITS OF A MANAGED ACCOUNT PLATFORM FROM THE PERSPECTIVE OF A GERMAN
INSTITUTIONAL INVESTOR
D
Achim Pütz
is a partner in Dechert’s
financial services group and
has extensive experience
in advising both German
and international clients on
traditional and alternative
fund structuring, structured
debt products and all
aspects of investment
strategy regarding complex
alternative structures.
uring the financial crisis of 2008, many
hedge fund managers exercised their right
to restrict fund liquidity, using their frequently underestimated legal powers to put
in place gates, suspend redemptions and
even segregate illiquid fund assets for years
in closed-end vehicles (so-called ‘side pockets’). Among
other factors, this resulted in a substantial deterioration of
liquidity for investors.
Single security deposit accounts held in trust – which
are known as segregated managed accounts – emerged
from the crisis as a favoured structural solution, as they
not only offer investors full transparency, but also an effective protection against the above-mentioned liquidity constraints. In a segregated managed account, the portfolio’s
liquidity derives from the liquidity set by the underlying
financial instruments, rather than by conflicting activities
of other investors who may force the hedge fund manager
to liquidate securities positions and thus take measures to
restrict liquidity.
STRUCTURAL SOLUTIONS
The experiences gained from the financial crisis caused
Bayerische Versorgungskammer (BVK), the largest German public pension scheme – with €50bn AUM – to carry
out an internal analysis of their existing hedge fund investments. This analysis indicated that it is reasonable for a
large investor such as BVK to invest in single hedge fund
strategies via managed accounts (MACs).
Therefore, BVK decided to structure and launch its own
BVK-controlled managed account platform (MAP).
LEGAL STRUCTURAL OBJECTIVES
With regard to the legal set-up of the MAP, the following
objectives in particular had to be taken into account:
y BVK, as the managing and representative body of
twelve professional and local pension schemes (BVK
Pension Funds) wanted to ensure that the BVK Pension Funds are the sole eligible investors for the MAP
and the portfolios of different investment managers
(portfolio managers) to be integrated. The assets managed by the portfolio managers should be held directly
by the respective sub-fund and controlled by the MAP
and its service providers.
y Any dependence on the MAP operator and other
service providers to the MAP should be avoided. In
the interest of the BVK Pension Funds, it should be
6 H F M W E E K . CO M
possible to replace these service providers as easily as
possible.
y It was necessary to safeguard the eligibility of the indirect investments of the BVK Pension Funds under the
provisions of German investment law and insurance
supervision law.
STRUCTURING OF BVK MANAGED ACCOUNT PLATFORM
On the basis of the above structural objectives, it was
determined that the following legal structure – as a platform vehicle – would be used: a Luxembourg Specialised
Investment Fund (SIF) pursuant to the Law on Special
Investment Funds dated 13 February 2007 (SIF Act), in
the form of a stock corporation (Société Anonyme – S.A.)
with variable capital (Société d’Investissement à Capital
variable – SICAV) (SIF SICAV S.A.).
The reasons for choosing a Luxembourg SIF include
its flexibility regarding investment policy, the lean regulatory regime accommodated to such vehicles (supervised
by the Commission de Surveillance du Secteur Financier
– CSSF), as well as its possible classification as a foreign
collective investment scheme, from a German regulatory
perspective. The legal form of a Luxembourg stock corporation was selected in order to set up an independent
corporate fund (rather than a contractually structured special fund dependent on a management company), which
grants voting rights to its investors and is independent of
the integrated service providers.
Moreover, for efficiency reasons, the SIF SICAV S.A.
was structured as an umbrella fund with several sub-funds.
The SIF SICAV S.A. has a central administrator and a
central custodian bank.
The MAP’s ongoing activities are co-ordinated and supervised by a specialised service provider, the MAP operator, which has been integrated into the MAP by way of a
tailored service agreement. The MAP operator is responsible, among other things, for the following:
y Legal and operational launch of the MAP and new
MACs on the MAP (as well as their liquidation);
y Legal and operational integration of fund infrastructure
into the MAP and the negotiation of service contracts;
y Initial and continuous operational due diligence of the
hedge fund managers and the fund administrator, the
custodian bank and the prime brokers, if applicable;
y Recommendation of investment guidelines for hedge
fund managers and negotiation of investment management agreements;
LEGAL
THE SET-UP OF A
PROPRIETARY MAP
FOR INVESTMENTS IN
HEDGE FUNDS MAY
CONSIDERABLY INCREASE
THE TRANSPARENCY
y Operative launch of commercial relationships
and negotiation of broker agreements with
prime brokers;
y Risk management, controlling and monitoring of compliance with investment guidelines,
as well as examination of counterparty risks;
and
y Provision of online reporting, allowing BVK
to review any and all positions of the MACs
at any time.
BVK thus outsourced all middle office and back
office operations to specialised service providers,
without giving up the unrestricted control of the
MAP as shareholder, or the ability to replace the
service providers at any time, pursuant to the relevant
agreements.
LEGAL QUESTIONS
Within the structuring process, a number of specific legal
questions arose, the key issues of which are discussed as
follows:
PERMISSIBILITY OF AN INVESTMENT IN MAP UNDER
INSURANCE SUPERVISION LAW
The BVK Pension Funds are subject to state regulation,
which is largely in parallel to the regulatory framework
governing the investments of German insurance companies. Therefore, it was necessary to structure the SIF SICAV S.A. and each individual MAC in a way to meet these
regulatory requirements.
UMBRELLA VERSUS STAND-ALONE
An initial question regarding structure involved whether
the launch of one or several umbrella SICAV or the use
of a stand-alone SICAV would be advantageous for each
managed account with regard to the legal and practical
consequences. It was determined to select an umbrella
SICAV, primarily for reasons of practicability and possible cost savings. Since an umbrella SICAV is a single legal
entity (despite a basically unlimited number of possible
sub-funds), it can be managed under corporate law in a
more efficient way than a number of individual SICAVs,
each with an executive board, general shareholders’ meetings, disclosure requirements, and so forth. In the case of
an umbrella SICAV, efforts to amend organisational documents would not need to be undertaken for individual
investment vehicles. The legal relationships with central
”
service providers can also be implemented and
later amended in a more efficient way and with less
documentation requirements.
This increased efficiency should result in considerable cost savings with increasing volume.
Furthermore, the launch of new sub-funds is easier
than the launch of a new SIF SICAV S.A. investment vehicle for each individual managed account.
A potential disadvantage to using an umbrella
SICAV might be increased liability risks due to
the umbrella structure. Any residual risks existing
in this regard were analysed for the United States
and the UK, which are eligible as potential (prime)
broker locations. Such risks were assessed as negligible, provided that appropriate contractual ring fencing
protections are included in the relevant agreements.
INTEGRATION OF A CENTRAL INVESTMENT MANAGER
Another important issue to be resolved was the question
of whether the respective portfolio managers should be
directly instructed by the MAP as to the management of
the relevant sub-fund, or whether it would be beneficial
to interpose the MAP operator and/or a group company
as a central investment manager to authorise the portfolio
manager within the framework of a sub-delegation.
During the discussions with the various platform operators it appeared, for a number of reasons, that the additional assignment of the function of an investment manager to
a platform operator might not be practicable.
Furthermore, a benefit of not having a central investment manager is that there is no risk that all sub-funds of
the MAP would be affected if a central investment manager fails.
Accordingly, the MAP was structured without interposing a central investment manager – since this was determined to be more beneficial in principle – provided
that adequate security mechanisms are implemented in
the contractual provisions with the MAP operator and the
portfolio managers.
The set-up of a proprietary MAP for investments in
hedge funds (and other asset classes) may considerably
increase the transparency and security of such assets
without causing higher costs for investors in the medium
term. These investment solutions will likely continue to
make their way into the market for the benefit of insurance holders, pension fund contributors and/or other
end-investors. Q
H F M W E E K . CO M 7
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
HEDGE FUND IN A BOX,
EVERYTHING YOU NEED IN
ONE PLACE…
JERRY LEES OF QUANT EXPLAINS THE IMPORTANT ROLE OF A MINI PRIME BROKER: TO GET YOU TO MARKET QUICKLY, BYPASS SET-UP AND
REGULATORY DELAYS AND RAISE FUNDS
“
Jerry Lees
is CEO of Quant and
chairman of Linear
Investments. As global head
of Alternative Execution
at CA Cheuvreux on the
executive board, Jerry started
and grew the Electronic
DMA, Synthetic Prime
Brokerage business initially
in Asia and then globally.
T
he times they are a-changing”, to quote Bob
Dylan, and never more so than in the financial
sector. After 2007’s crises (Lehman, Madhoff, Bear Stearns, MF Global and the collapse of numerous hedge funds) we are faced
with a very different and complex market,
one more difficult than any of us have faced before. But,
as ever, troubled times throw up opportunities as well as
issues. For many who are now leaving bulge bracket firms
or who are in the process of setting up a new fund or prop
trading business, this is distinctly a time of opportunity
– but not one without risk. Even established mid-sized
hedge funds are being kicked out by their prime brokers
as unprofitable, as they tighten their belts and command
huge minimums. But once again,
there is a solution.
There is a real chicken and egg
dilemma to be faced. Because of
recent events, investors from all
levels of the investment community have an understandable mistrust of unproven and untested
products. There is no point in a
new fund coming to investors
with a plethora of historical back
testing. The investor won’t believe
you, and probably rightly so – I
have never seen an unprofitable
back test. Equally, a track record
at a certain bank or fund is no
proof that you can do the same job
within the constraints of the new
entity and in the new market conditions, which are very
different now. So, how do you prove your track record
(while having only a limited initial investment) without being brought down by costs and shunned by every
prime broker on the block because you are too small and
puny to matter? If you have tried, you will recognise the
phrase, “come back when you have $200m under management, but don’t bother us before”.
get a reasonable deal for execution costs and potentially
some leverage, so that the trading strategy can be proven.
Meanwhile, it will take you more than 18 months to get
regulatory approval and will cost north of £200,000 to
set up the fund. You will need to get an operating business in place and get regulatory approval before building your track record. At the same time, there are salaries
to be paid, compliance to be dealt with and offices to be
sourced and paid for. It doesn’t take much to realise that
this is likely to be a serious roadblock!
Besides these potential troubles, funds with less than
£75m in assets have difficulty finding prime brokers. As a
small player, if they do find a prime broker, they are often
faced with high minimums, impossible financing rates,
limited leverage, high brokerage
fees and second rate service levels.
In addition, the trouble with
setting up a new hedge fund or
prop trading business is that the
people who are most likely to
create effective trading strategies
– which produce the return and
create value – are often the least
experienced in terms of running
a day-to-day business. There is a
conflict here: unless the business
is set up on sound operational
lines and with a solid understanding of the operational constraints,
timescales and costs, there is little
chance of the fund’s raising and
trading side succeeding. The reason for this is that costs combined with timescale can
completely overwhelm the strategic business goal of producing a viable track record.
YOU NEED TO SET UP A
FEASIBLE, REGULATED
ENTITY WITH LIMITED
CAPITAL, WHICH IS NOT
OVERWHELMED BY SET-UP
AND RUNNING COSTS
”
OVERCOMING HURDLES
How do you overcome these hurdles? You need to set up
a feasible, regulated entity with limited capital, which is
not overwhelmed by set-up and running costs. It needs to
8 H F M W E E K . CO M
WE CAN OVERCOME – A HEDGE FUND HOTEL BUT MORE…
Linear Investments and Quant Execution Management
Services (Linear/Quant) have been set up specifically
to address the issues faced by the smaller hedge fund or
prop trading desk. The aim is to provide a menu of options to address all of the client’s needs. For some, the
fact that at Linear/Quant we can provide the full FSA
umbrella in weeks (with regulatory capital in place) and
provide access to a fund cell (prime brokerage plus capi-
PRIME BROKER AGE
tal introduction) at a stroke is a major opportunity. But we go further in providing outsourced
desk execution, DMA access across global markets and instruments and a fully technologically
equipped trading desk platform in the heart of
London. Others may wish to select our prime
brokerage offering without the other aspects,
or just come to us for regulatory support while
they build a track record. It’s flexible, the choice
is yours.
LINEAR/QUANT PROVIDES
TAILORED PRIME
BROKERAGE SERVICES TO
START-UP, SMALL AND MIDSIZED HEDGE FUNDS
HOW DOES IT WORK?
On the prime brokerage side, Linear and Quant
consolidate flows and business from more than
60 clients, giving us considerable negotiating
power with global brokers and prime brokers.
Our assets under management and trading capacity are such that the smaller player is part of a bigger picture to the global or prime broker. Through consolidation and discounted pricing, we are able to pass on
these lower rates and fees to our partners. Often it is the
case that no other prime broker will consider the smaller
hedge fund or prop desk in the first place.
Within Linear/Quant Mini Prime, smaller funds pay
less for trading and get competitive pricing (with no
minimums) by taking advantage of our consolidated
flows and negotiating power. Linear/Quant provides
tailored prime brokerage services to start-up, small and
mid-sized hedge funds that are not serviced by larger
prime brokers in Europe. In essence, funds get better
servicing and pricing through our aggregated prime
broker relationship, as well as legal and administrative
support; day to day trading support and execution; and
an outsourced trading desk and DMA. It is effectively a
hedge fund hotel.
”
LINEAR INVESTMENTS – INCUBATION PLATFORM
Linear is set up to nurture all types of financial
services companies who need to conduct regulated investment business under the UK Financial
Services Authority (FSA registration 537389).
Incubation allows firms to establish a track record
and gain experience, as well as competency, while
building critical mass.
Individual FSA authorisation can be a long and
expensive process with a minimum nine-month
slog to gain FSA regulated status. Post-2008 regulation for any size of financial services firm is essential. From the client’s perspective it avoids putting
up excess regulatory capital, provides a strong operational structure and allows for a short timeline
to be able to conduct business.
LINEAR/QUANT – MINI PRIME BROKER
The prime brokerage offering enables a hedge fund to utilise Linear/Quant relationships with multi wholesale brokers and a unique set of mini prime offerings. Mini primes
are viewed as an omnibus account aggregated to the prime
brokers, allowing your firm to benefit from favourable
pricing and servicing from the prime broker.
In summary, the partnership provides operational support in setting up, legal, administration and regulatory advice. In addition, we provide an outsourced trading desk
and regulatory support such as compliance. Access to office space, trading and technology facilities is also an option in the context of a hedge fund hotel. With access to
multiple trading accounts, we provide one contact to track
the different accounts. In essence, we build an offering tailored to your needs. Q
For further information contact Jerry Lees – CEO Quant
& chairman Linear Investments: [email protected]
H F M W E E K . CO M 9
A successful
alternative investment firm
needs to grow its business
not its list of to-dos.
At Equinoxe, we understand the walk along the efficient frontier taken
by alternative investment managers like yourself. So when we administer
your account, you have seasoned professionals dedicated to your fund
and its investors. This experience, coupled with our bespoke operating
model and flexible reporting, lifts the weight of every administrative
detail from your shoulders and places it squarely on ours.
www.equinoxeais.com
Stephen Castree, [email protected], global
Chris Foy, [email protected], usa
Rod White, [email protected], bermuda
Alan McKenna, [email protected], ireland
Irfaan Hossany, [email protected], mauritius
LEGAL
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
ATTRACTING THE ‘BEST OF
BREED’ FOR MALTA’S FINANCIAL
SERVICES INDUSTRY
ANDREW ZAMMIT, CHIEF LEGAL OFFICER OF CSB GROUP, GIVES AN OUTLINE OF THE HIGHLY QUALIFIED PERSONS RULES, 2011
M
Andrew J. Zammit
is managing partner of
Zammit & Associates –
advocates and chief legal
officer of the CSB Group,
practising company law,
financial services regulation,
hedge fund registration,
internet law and ship and
yacht finance.
alta has attracted much media attention as an up-and-coming onshore
financial centre, particularly since
the 2008 economic slowdown. It has
become widely acknowledged as an
EU jurisdiction where things get done
efficiently and with the right balance between prudential
supervision and pragmatic regulation, enabling businesses
to develop lasting and meaningful relationships with their
regulators and better business for the regulated operators,
while also offering a quality Mediterranean lifestyle with
a strong Anglo-Saxon work ethic. This development has
most recently been extensively covered by Bloomberg
and the Financial Times, both of which have extensively
praised Malta’s virtues.
The surge in the number of international businesses
establishing some or all of their operations in Malta, particularly in the regulated industries of financial services
and internet gaming, has created a marked shortage in the
supply of certain specialised skills within these industries.
These growing pains have been managed by the Maltese
government through various initiatives including the incentivising of advancement into tertiary education and
ongoing training. However, besides such incentives, the
government has also acknowledged the value of attracting
additional human capital possessing the technical knowledge and experience to advance these industries and secure Malta’s position as a centre of excellence in the international financial arena.
With this objective in mind, in 2011 the Malta Government introduced specific tax rules targeted at highly qualified persons performing particular functions within Malta-based operators duly licensed by the Malta Financial
Services Authority (MFSA) or the Lotteries and Gaming
Authority (LGA). These rules are contained in the Highly
Qualified Persons Rules, 2011 (HQP Rules).
The HQP Rules are effective in respect of income earned
by qualifying individuals in and from 1 January 2010.
THE PROPOSITION
In terms of the HQP Rules, a 15% flat rate of tax would be
chargeable on employment income derived by duly qualified,
experienced and senior personnel holding an ‘eligible office’.
This favourable tax rate applies in respect of such income up
to a maximum of €5m per annum. Any income in excess of
the €5m threshold is exempt from Malta tax altogether.
The ‘eligible offices’ enumerated in the HQP Rules are
the following:
• Actuarial professional
• Chief executive
• Chief financial officer
• Chief commercial officer
• Chief insurance technical officer
• Chief investment officer
• Chief operations officer
• Chief risk officer (including fraud and investigations
officer)
• Chief technology officer
• Chief underwriting officer
• Head of investor relations
• Head of marketing (including head of distribution
channels)
• Head of research and development (including search
engine optimisation and systems architecture)
• Portfolio manager
• Senior analyst (including structuring professional)
• Senior trader/trader
• Odds compiler specialist
CONDITIONS AND EXCLUSIONS
In general terms, anyone seeking to benefit from the 15%
tax rate must satisfy all of the following conditions:
1. Derive employment income of at least €75,000
(exclusive of the annual value of any fringe benefits and adjusted annually in line with the domestic
retail price index) which is subject to tax in Malta;
2. Be employed by a company licensed by the MFSA
or the LGA (as the case may be) to hold an eligible
office in terms of an employment contract, which
is subject to the laws of Malta;
3. Satisfy the MFSA or the LGA (as the case may be)
that:
i. the relevant contract of employment relates to work
genuinely and effectively performed in Malta;
ii. they are in possession of professional qualifications in
terms of the HQP Rules; and
iii. they perform activities of an eligible office.
4. Declare and confirm, inter alia and in the prescribed application form, that they:
i. are not and have not been domiciled in Malta and do
not intend to reside in Malta permanently;
ii. have not benefitted from the special domestic tax
H F M W E E K . C O M 11
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
1 2 H F M W E E K . CO M
LEGAL
rules applicable in respect of investment services and
insurance expatriates with respect to relocation costs
and other expenses (under article 6 of the Income
Tax Act);
iii. are in receipt of stable and regular resources, which
are sufficient to maintain themselves and the members of their family without recourse to the social assistance system in Malta;
iv. reside in accommodation regarded as normal for
a comparable family in Malta and which meets the
general health and safety standards in force in Malta;
v. are in possession of a valid travel document; and
vi. are in possession of sickness insurance in respect of
all risks normally covered for Maltese nationals for
themselves and the members of their family.
15% rate, such as where the employer receives any direct
or indirect benefits under certain business incentive laws,
or if the individual holds more than 25% (directly or indirectly) of the company licensed and/or recognised by the
relevant authority, or if the individual is already in employment in Malta before the coming into force of the scheme
either with a company not licensed and/or recognised by
the respective authority or not holding an ‘eligible office’
with a company licensed and/or recognised by the relevant authority.
The Rules provide that any person abusively seeking to
claim benefits under the Rules without entitlement may
face a penalty equal to the amount of benefit claimed
together with additional tax imposed at a rate of 7% per
month or part thereof.
The favourable 15% tax rate prescribed under the HQP
Rules would apply for a maximum consecutive period of
five fiscal years in favour of EEA (including EU) nationals
and for a maximum consecutive period of four fiscal years
in favour of third country nationals (nationals of non-EEA
countries).
It is important to state that the HQP Rules do not apply in respect of any person employed in Malta prior to 1
January 2008. On the other hand, an individual employed in
Malta on or subsequent to 1 January 2008 would be entitled
to benefit from the favourable flat tax rate, but the said benefits would nevertheless be limited to five years from the date
of commencement of the qualifying employment. Thus, for
example, a Swiss chief investment officer employed with
a Malta-licensed asset management company and having
a qualifying contract of employment in an ‘eligible office’
starting in 2008 (basis year) will be able to benefit from the
HQP Rules 15% tax rate for a period of three years – basis
years 2010 (the first year in respect of which the HQP Rules
became effective), 2011 and 2012, – while a third country
national will benefit from one year less.
The Rules also provide for certain circumstances that
would effectively exclude the application of the favourable
REACHING OUT FOR THE FUTURE
With the HQP Rules complementing Malta’s fiscal, professional and infrastructural framework, international financial operators have been provided with an additional
incentive to consider establishing or expanding their
Malta operations. Operators already established in Malta
have the benefit of being in a position to attract top talent
from within the EEA and beyond, providing prospective
employees with an attractive net remuneration package. In
addition, operators looking for an alternative or complementary base for their operations may benefit from Malta’s attractive corporate tax system and also facilitate the
relocation of staff falling into the eligible office categories
set out in the HQP Rules.
It is expected that the introduction of the HQP Rules
will inject new talent, knowledge and skill into the Maltese financial services industry, further contributing to
the Government’s target to increase the country’s GDP
derived from financial services from the existing 12% to
20%. And with the continuing efforts being made, both in
the public and the private sector, to improve Malta’s international service offering, this ambitious objective appears
clearly within reach. Q
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solution for small and mid sized funds.
www.linearinvestment.com | www.quantems.com
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
START-UP HEDGE FUNDS
MUSH ALI OF ONE TEN ASSOCIATES EXPLAINS THE DIFFERENT CHALLENGES FACING COOS OF HEDGE FUND START-UPS
O
Mush Ali
is director at One Ten
Associates – a specialist
hedge fund recruitment firm.
He qualified as a chartered
accountant before starting
his career in recruitment
nearly 10 years ago. A
specialist in the sector, his
expertise lies in finding
“non-investment” talent for
the hedge fund industry
and service providers.
14 H F M W E E K . CO M
ver the last 12 months we have seen a significant increase in the number of startups in the EU, particularly in London.
Below are some of the questions we receive from our hedge fund start-up clients
and our responses to them.
Q: Our investors and regulators
expect more from us in terms of
governance, systems and processes. To what extent can we ensure we have our bases covered?
A: The reality is the investors
want to be comfortable the COO
has the background to be able to
handle the increased complexity of regulation, governance and
controls.
The good news is the COO candidate market has matured so their
experience and knowledge level of
the requirement is also demonstrated in what they have
performed for other funds.
One of the challenges in this area of hiring is the
perception that the COO has to be an ACA – it is
perceived that they have better experience to handle
the complexity of issues. In our opinion, it is the only
crude tool in place to make this judgment call, though
it shouldn’t be the only tool used
to judge a COO’s suitability,
and their practical experience in
where they are currently working and have worked previously
should be properly assessed
alongside a professional qualification.
THE QUALITY OF THE COO
HAS BEEN SIGNIFICANT
IN GETTING BOTH
REGULATORY APPROVAL
AND INVESTOR CONFIDENCE
”
Q: Which roles are becoming of
increasing importance at a contemporary European start-up?
A: As discussed in the previous
question, the quality of the COO
RECRUITMENT
has been significant in getting both regulatory approval and investor confidence.
Alongside this, we have seen an increase in demands on compliance and in-house management
of compliance, certainly when a fund looks at a
multi-jurisdiction fund, for example FSA and SEC.
At that point the need for someone with legal and
compliance knowledge is vital.
The outsourced compliance providers seem to
be doing an excellent job of supporting COOs
through this journey, but after 12 months invariably they realise they need someone managing this
full time.
There is no exact answer to how this is managed,
but the hires around the infrastructure need to be able to
cope with a variety of expertise, from day-to-day operations to accounting, legal and compliance issues.
It is unrealistic to expect a COO to be an expert in all
these areas and invariably the COO will need a good operations person. In recent times, this has seen demands for
a compliance hire, possibly part-time rather than full-time,
to cope with increasing demands in this area.
THE CHALLENGE FOR
START-UP HEDGE FUNDS
IS THE ABSOLUTE NEED
TO BRING QUALITY NONINVESTMENT TALENT
Q: Does it make sense to bring in a marketing/sales
person at the beginning?
A: We find the reality is that the first 12 months of a startup is about getting the performance and operational infrastructure to work. The marketing/sales person should
come in after the first 12 months because the reality is investors want to see a track record before considering due
diligence.
It should be a key hire for any CIO/CEO of a fund because it also makes the fund look more credible if someone
”
else is speaking to them about it rather than the
CIO/CEO himself.
Q: Are increasing regulatory/investor expectations decreasing the talent pool by increasing
experience requirements? Is this increasing the
cost of hiring suitable staff for start-ups?
A: It is absolutely true that we have seen a decrease in the qualified talent pool that investors
are demanding, but in turn we have not seen the
increase in the cost of hiring people follow a similar trend.
This may change, but the reality is hedge funds
are small businesses and quality candidates are not
as focused on the basic salary as they are about ensuring
they participate in the upside, and this is where CEO/
CIOs of funds need to be realistic and need to appreciate
the risk they are taking. There are of course different tools
in place to achieve this when trying to attract the top-end
high-calibre infrastructure talent.
CONCLUSION
In conclusion, the challenge for start-up hedge funds is the
absolute need to bring quality non-investment talent. It is
more demanding now than it has ever been, and for two key
reasons: the infrastructure and regulatory demands of what
needs to be in place and the increasing influence of the existing investors and perception of future investors.
However, one thing that has remained constant is that
both investment and non-investment professionals continue to be driven and motivated by the hedge fund sector
and that is what is amazing to see, despite the challenges
in the industry over the last five years. Q
H F M W E E K . C O M 15
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O P E R AT I O N S
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
FLEXIBLE SOLUTIONS
AMBASUTHAN JANANAYAGAM OF POINT NINE TALKS TO HFMWEEK ABOUT WHY START-UP MANAGERS NEED TO BE FLEXIBLE DURING
UNCERTAIN TIMES
A
Ambasuthan
Jananayagam
is a partner at Point Nine
Financial Technologies, an
independent middle and
back office solutions provider.
He was formerly head of
Emerging Markets Credit
Derivatives for ABN AMRO.
consensus within the fund management
industry appears to be forming that investors should brace themselves for a
period of less than exciting returns as a
result of the prevailing macro-economic
headwinds.
Middle and back office solutions, whilst less interesting than contemplating the changing global dynamics, is
impacted by it and more importantly, the decisions that
fund managers make in this critical aspect of a fund’s infrastructure will determine their ability to navigate these
austere times.
DEMANDING INVESTORS
Investors have already reacted to the shifting balance of
power. Many fund managers will
confess that the investor community, and in particular seed investors, are taking advantage of the
current climate.
Further, many fund managers
will admit that double-digit returns
seem unlikely in the medium term.
In such a climate, refocusing on
operational alpha (in particular
outperformance via cost efficiencies) is almost mandatory.
However, focusing on headline
direct costs alone isn’t prudent. Expenditure on variable and indirect items can outweigh by
multiples the savings made on low-cost solutions.
and some mid-tier fund administrators are opting for independent solutions.
Prime brokers and custodians are also reassessing their
offerings. The industry is refocusing its resources away
from start-ups, with the boutique investment banks setting
the trend and the large balance-sheet banks following suit.
Offering start ups free consulting and other services in
the hope of earning the fees back from trades and financing agreements, seems to be making less business sense.
A recent Oliver Wyman banking survey concluded that
20% of revenues originating from 15 business lines made
no economic profit at all. The best returns came from just
8 to 10 business lines. “Before the crisis the biggest contributor to (bank) return on equity was leverage, rather
than operating margin”, echoed the Financial Times’ Lex
column on 29 March. It was perhaps inevitable that banks would
reassess all their business lines.
Prime brokerage divisions, like
other internal departments, will
need to demonstrate concrete revenues from clients, regardless of
their size.
EXPENSIVE MIDDLE
OFFICE EXPANSIONS
DO NOT GUARANTEE
LARGER PROFITS
IMPLICATIONS FOR START-UPS
The result is an uncertain climate
for the start-up manager in 2012.
The temptation is to contain the
contracted fixed costs of thirdparty vendors. However, inflexible solutions can have financial repercussions when change is needed. Further, the
growth and performance of the fund will depend much
more on understanding the indirect and variable costs
too, which will eventually outweigh the fixed costs by multiples.
It is critical to any business to curb fixed costs. In the
middle office space the spectrum of costs (and resultant
services) can vary quite substantially. In last year’s price
race to the bottom the vendor market offered some startling deals to high pedigree start-ups.
However, funds need to look beyond the headline prices and consider their growth, which will vary based on the
complexity of the fund.
The variable costs of any fund will expand with growth.
The in-house operational and technology infrastructure
will grow with expanding instruments, new third parties
(prime brokers, custodians and trading counterparts) may
be needed and there will be evolving internal demands.
The indirect costs will also begin to spiral. As an example,
”
THE VENDOR LANDSCAPE
In the post-crisis squeeze vendors’ margins have been
squeezed.
The fund administration industry is a pertinent example. Minimum fees have been compressed to historical
lows and only the growth of Assets Under Management
(AUM) will result in increased profitability. Analysts have
long predicted that the fund administration industry is
overdue for consolidation. A round of consolidation may
result in new strategies, such as refocusing on mid-tier
funds, at the expense of smaller funds.
The margin pressure is also impacting fund administrators’ product offerings. Pre-crisis, many fund administrators would have considered middle office a synergetic offering which made commercial sense.
However, in the current uncertain climate, expensive
middle office expansions do not guarantee larger profits,
H F M W E E K . C O M 17
O P E R AT I O N S
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
Be conservative about revenues and growth:
Start-up managers need to recognise the challenging environment they are choosing to launch
in and allow for longer timetables for investors’
approval committees to release funds and to potentially launch with smaller commitments than
expected.
Keeping fixed costs low: Ensuring that the fund
has accounted for the full spectrum of fixed costs
that it will take to launch is rudimentary homework. These costs measured against expected revenues from fees on AUM will give some indication of how much ‘negative carry’ a fund manager
can be expected to endure, and provide a basis for
sound financial planning.
simply rolling the FX forwards quarterly can cost
a fund as much as 40 cents in bid-offer costs (for
example $40,000 on a $10m, three month, EUR/
USD, forward contract). These are hefty costs given
the liquid nature of G7 FX forwards market.
The ability to incorporate collateral management capabilities will permit direct dealing on
OTC derivatives with multiple counterparts and
can slash such indirect costs by over two-thirds.
This is one of many reasons funds set up independent middle office capabilities as soon as they can
afford to.
Investor due diligence requirements: Investors are in the driving seat and so providing
them with transparency and meeting their due
diligence criteria are critical to growth.
THE FUND MANAGEMENT
INDUSTRY IS CLEARLY
MATURING. HOWEVER,
THE FUNDAMENTALS OF A
FUND MANAGEMENT FIRM
REMAIN FAIRLY OBVIOUS
DUE DILIGENCE REMAINS STRINGENT
For its part, the investor community has maintained the stringent due diligence demands introduced during the crisis. Taking into account the
raft of impending legislation, fund managers’ operational hurdles have never been higher. Some of
the components of the checklist are having multiprime broker/custody arrangements, transparent
reporting including items such as counterparty risk (ideally on a daily basis), independent operations processes and
valuations, comprehensive disaster recovery procedures
and a string of other essentials.
Scandals like Madoff have made some of these requirements non-negotiable. After all, if Madoff had had independent counterparty risk reports, investors would have
known exactly where their assets were held.
Further, a raft of new regulations are pending implementation over the coming years. The key to compliance
may lie within the operational infrastructure set up by the
fund manager from the outset. For example, if a fund cannot view its positions in real-time across custodians (and
derivatives counterparts) and different instrument types,
it is unlikely that it will be able to comply with its risk reporting needs.
PLANNING THE LAUNCH
The fund management industry is clearly maturing. The
margins are getting tighter, and the barriers to entry are
getting higher. However, the fundamentals of a fund management firm remain fairly obvious.
18 H F M W E E K . CO M
”
Accommodating variable costs: These are real
challenges in planning a funds infrastructure. In
the middle office space, for example, variable
costs include everything from internal operations personnel (where an outsourced solution
is not complete or there is no outsourcing); the
technology resources and spend when there are
problems with the technology infrastructure; to
management time spent on dealing with these
‘engine room’ issues. The fund manager needs
to allow for changes in third parties, expansion
of requirements (for example collateral management, valuations, and so on) and changes in
the types of instruments traded. The last thing a
fund needs are crippling bills to change the associated infrastructure.
Minimising large indirect costs: A decision to
implement a low fixed cost middle office solution
can result in a less flexible infrastructure. As the
fund grows, its dealing costs and funding cost
can become a multiple of its infrastructure cost.
This is a key reason funds develop independent
middle and back office capabilities, as trimming
those indirect costs will result in genuine ‘alpha’.
CONCLUSION: BE PREPARED
2012 will continue to provide a challenging environment
for start-up managers. The key to managing the uncertainty will be flexibility. For middle and back office that means
not necessarily choosing the cheapest available solution,
but a solution or solutions that will evolve with the fund.
Investor demands haven’t relented and so getting the
due diligence right and transparent reporting to investors
will remain important.
The direct costs will matter, but they should not preside
over the flexibility necessary to grow the fund. Eventually
the indirect costs will become the biggest drag on performance and implementing the optimal growth plan will be
the key to success. Q
C O R P O R AT E G O V E R N A N C E
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
HOW TO MEET INVESTORS’
EXPECTATIONS?
PHILLIP CHAPPLE OF KB ASSOCIATES DISCUSSES SOME OF THE DEMANDS OF STARTING A HEDGE FUND INFRASTRUCTURE
S
Phillip Chapple
is an executive director
of consulting firm KB
Associates. He has held
senior positions in both
the hedge fund and prime
brokerage industries.
Specialities include assisting
start-up hedge fund
managers and helping
managers prepare for
investor due diligence.
etting up a hedge fund infrastructure requires
a strong understanding of the business, as
well as the investors’ needs. Phillip Chapple,
executive director of KB Associates, gives
some pointers on how to ease the process.
HFMWeek (HFM): In recent months/years, have you
witnessed a growing interest from investors for startups and why?
Phillip Chapple (PC): We have definitely seen an uptake in the smaller end of the investment market, partly
because after the 2008 crisis investors retracted from the
start-up space into the bigger safer options. But then investors came back looking for more interesting and smaller
funds, looking for an access to higher alpha opportunities.
HFM: What are the main challenges when starting a
hedge fund?
PC: Managers have to find the
right balance between building a
viable business and demonstrating the requisite controls and risk
mitigation in their infrastructure.
It would be straight forward for a
manager with $70m AUM to build
everything that is required to meet
the level of investors due diligence
required by the average hedge fund
of fund. So the challenge for a startup is to work out in detail what are
the risks related to its strategy and
how to mitigate them while building a viable business. In
other words, the manager has to comfort the investor that
he knows what he is doing and that the risks they are buying are all in the strategy and not in the infrastructure.
them to build the appropriate infrastructure and meet an
investor’s due diligence requirements.
HFM: What are investors looking for when choosing a
start-up?
PC: They are looking for some kind of exposure that they
are not going to get from a big established manager. So
they want to see unique selling points, they want the startup manager to have either some expertise, access, or any
other unique reason why the manager can offer something
different that sparks interest. Last year, for example, most
of the mandates were very much directed at ‘quant’ or systematic funds. Now, they are looking at macro funds and
idiosyncratic strategies, as long as the liquidity is still there.
For example, I’m currently working with a Chinese environmental fund. Investors have understood that the main
risks in investing in Chinese environmental funds would
be local infrastructure and local
currency risks. But this particular
manager is focusing on only equities traded on the Hong Kong stock
exchange and setting everything in
dollars. So you have avoided the
two main risks and you have given
the investors a risk exposure they
are interested in. You need to have
those unique selling points that investors can see and that make them
want to buy that risk.
THE MAIN THING IS
TO START WITH AN
INTERESTING ALPHA
PROPOSITION
”
HFM: How can start-ups attract an investor’s interest?
PC: The main thing is to start with an interesting alpha
proposition and this is the toughest part for a start-up.
Even though it is not easy, you can build an appropriate
infrastructure, you can set up all the operational requirements and meet all the due diligence requirements. But
you need to have a core alpha opportunity, which is well
defined and is of interest for investors. It certainly helps
if the strategy meets investors’ current mandate requirements. We spend a lot of time meeting with potential startups just to try and work out if they are viable. We only really want to engage with people if we think they have a viable
opportunity that we can actually add value to by helping
HFM: What are the key requirements from investors that constitute a challenge for a
start-up? And how can a start-up overcome these hurdles?
PC: One of the main challenges for a start-up manager is
a lack of transparency. Although the investors’ standards
have risen, it is quite rare to get effective feedback from
many of the investors, mainly because of how they are
structured. Investors are looking at a number of names
and trying to shortlist a few that they want to invest in.
Due diligence is in the main now performed before rather
than after the investment decision. The main way to find
out is to try to step back and take a realistic third-party
view of your offering, and try to identify all the risks in
both the product and the infrastructure, because that is
what a potential investor will look to do. Investors want
to understand the risks that make up the strategy but they
want to identify risks due to the infrastructure of the fund
or manager and to identify if any level of control is missing, for example around cash management, corporate
H F M W E E K . C O M 19
C O N S U LTA N C Y
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
governance, insurance, the language in place with
your prime broker, who the prime brokers are and
if you have got the right liability in place with your
service providers.
The manager, more than anybody else, should
understand the risks around what he is doing and
should be able to properly explain them.
Once the manager understands what the investors are looking for, the challenge is to build the
control and the necessary infrastructure in a way
that meets the investors’ requirements and enables
him to run his business and be viable.
MANAGERS HAVE TO
FIND THE RIGHT BALANCE
BETWEEN BUILDING A
VIABLE BUSINESS AND
DEMONSTRATING THE
REQUISITE CONTROLS AND
RISK MITIGATION IN THEIR
INFRASTRUCTURE
HFM: At KB Associates, how do you assist startups to attract investors and meet their requirements?
PC: We project manage the full set-up for a manager. So
we help them choose their lawyers, their compliance advisors, their prime brokers, their administrator and their systems. We are not just trying to select them, we look at the
operating procedures around each of those providers and
we help negotiate the Service Level Agreements (SLAs),
we look to build an operational infrastructure, which will
give comfort around the necessary controls and process
for the manager’s strategy, build the corporate governance
and then create the Due Diligence Questionnaire (DDQ).
We look at everything the manager needs, to make sure he
can pass due diligence.
HFM: What is the key point a manager should always
have in mind when starting a hedge fund?
PC: The manager always has to think in terms of how the
investor thinks and always has to try to take a third person’s view of his product because in effect he needs:
• A reason for the investors to invest: it is not enough
to build a start-up and hope the investors will come.
The manager needs to have a distinctive proposition
for them.
20 H F M W E E K . CO M
”
• To look at every part of his offer and make
sure there are no inappropriate risk exposures.
If he doesn’t identify them, an investor may
pick them up and is unlikely to tell him about
it. It is important to read through every single
document. It might seem boring or he might
feel that he has paid other people to draft these
documents, but he has to understand all facets of his infrastructure, and if he doesn’t he
has to keep asking questions until he does. He
shouldn’t presume that everything is standard.
HFM: How do you see the future for start-ups?
PC: In terms of regulation, the AIFM Directive
will surely have an impact on start-ups, but we
have to wait for its full implementation to really
understand the full effects. The new regulations in the US
have already provoked some managers to avoid US investors for their funds.
In terms of the process of starting a hedge fund, I
don’t think the current trend of increasing due diligence
is going to ease up. As the investor base for hedge funds
becomes more institutional in nature, due diligence has
become key in allowing investors to gain comfort over
which risks he is taking. A positive for start-ups is that we
are seeing investors widen their investment mandates.
Managers have to be exactly in the investors’ mandate to
have any chance of raising assets. When those mandates
are widening, in effect more managers should fit into the
mandate requirements so there are more strategies that
can attract investment. We also see an appetite from
many investors to source early stage managers due to the
higher alpha available in the early stages of a fund. It is
possible to get started now, as long as you have a defined
alpha proposition that meets the mandate requirements
of investors and you have an infrastructure that demonstrates that all the risks are in the strategy and not the
infrastructure. Q
LEGAL
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
QUALIFYING INVESTOR FUNDS –
THE REGULATED ALTERNATIVE
DERBHIL O’RIORDAN OF DILLON EUSTACE EXPLAINS IRELAND’S BENEFITS AS A REGULATED JURISDICTION FOR ALTERNATIVE FUND INVESTORS
AND FUND MANAGERS
A
Derbhil O’Riordan
joined Dillon Eustace
in 2003 and became a
partner in 2010. She advises
primarily in the area of
investment funds and
has particular expertise in
exchange traded funds,
hedge funds, sophisticated
Ucits and has also advised
in relation to the listing rules
of the Irish Stock Exchange.
s investors are seeking more security, transparency and regulation, and as fund managers seek to broaden their distribution bases,
more and more managers are looking to regulated jurisdictions as alternative domiciles
of choice to traditional offshore solutions.
Ireland has long been considered the regulated jurisdiction
of choice for fund managers, offering flexibility, expertise,
international brand recognition and a favourable tax regime
to the global funds industry for more than 20 years.
The European community has more recently moved to
provide a regulated solution for alternative funds with the
Alternative Investment Fund Managers Directive (AIFMD), which will become law across the European community by 22 July 2013. The AIFMD, which applies to any
so-called Alternative Investment Fund Manager as defined
in the AIFMD, offers a pan-European passport to compliant Alternative Investment Fund Managers (unless a partial
or complete exemption applies or
the activities in question fall outside
the scope of the AIFMD) and their
compliant alternative investment
funds (including all types of legal
structure, strategy, liquidity and domicile). Ireland, and in particular the
Qualifying Investor Fund (QIF), is
AIFMD ready, with the QIF already
meeting many of the requirements
of the AIFMD. Therefore, existing QIFs are expected to make the
transition to AIFMD, including the
benefits of the pan-European passport, with minimum disruption and
amendment.
certain appropriate expertise/understanding tests. An exemption from these requirements is available to the QIF’s
managers and other persons that are closely connected
with the management of the QIF.
FAST TRACK AUTHORISATION FOR QIFS
The Central Bank of Ireland (Central Bank) does not
require prior filing or review of fund documentation for
QIFs. Instead, there is a self certification regime (certification has to be given by the QIF and by the Irish legal
advisers). With certification, the fund documentation is
simply negotiated between the promoter, the legal advisers and the other service providers and then executed and
filed with the Central Bank. Provided that the documentation is filed by 3pm on the day prior to the date for which
authorisation is sought, the QIF will be authorised on the
requested date without a prior review. A ‘spot check’ post
authorisation review may then take place.
QIF LIQUIDITY AND INVESTMENT RESTRICTIONS
QIFs can be structured as openended, open-ended with limited liquidity, limited liquidity or closedended schemes. Gates, deferred
redemptions, holdbacks, in-kind
redemptions and side pockets can
all be facilitated within these types
of funds.
QIFs are subject to very few investment restrictions in respect of
direct investments as follows:
(a) When transacting over-thecounter in circumstances where
collateral is being passed by the QIF outside the Irish
trustee/custodian’s custodial network, QIFs are generally required to deal with counterparties with a minimum
credit rating of A2/P2 (or A1/P1 where the QIF’s exposure to such a counterparty may exceed 40% of its net asset
value).
(b) QIFs structured as investment companies must
comply with the principle of ‘spreading investment risk’.
It is left to the discretion of the board of directors to determine actual diversification with reference to particular
strategies.
(c) QIFs may invest up to 100% of assets in underlying
regulated or unregulated funds but no more than 50% of
net assets in a single underlying fund. Investment in an underlying fund in excess of 50% of net assets will be treated
as a feeder type investment.
QIFS ARE THE MOST
FLEXIBLE OF IRISH FUND
STRUCTURES, WITH FEW
INVESTMENT LIMITS AND
NO BORROWING LIMITS
”
A BRIEF DESCRIPTION OF QIFS
QIFs are the most flexible of Irish fund structures, with
few investment limits and no borrowing limits, but with
minimum subscription requirements and appropriate expertise/understanding criteria. QIFs provide a high level
of structuring flexibility, as well as a fast track authorisation process. Similar to Cayman funds, QIFs have traditionally been sold on a private placement basis, offered in
accordance with the relevant target jurisdictions’ local private placement rules. Although this practice will continue
outside of the European Union, on implementation of the
AIFMD, QIFs will benefit from passporting provisions
within the European Union.
QIFs are subject to a minimum subscription requirement of €100,000 per investor and investors must meet
H F M W E E K . C O M 21
LEGAL
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 2
able investors at the Irish Master
Fund level.
•
A Delaware, Cayman
or other offshore feeder fund
typically structured as a limited
partnership or limited liability
company (the Non Irish Feeder
Fund). The Non-Irish Feeder
Fund will be targeted at US taxable investors and is often optional. From a tax and regulatory
perspective, US taxable investors
could invest directly in the Irish
Master Fund instead of investing
indirectly through their investments in the Non-Irish Feeder
Fund.
•
The Irish Master Fund
invests directly in the underlying
assets availing of Ireland’s exempt
domestic taxation regime for payments or transfers to the Irish and
Non-Irish Feeders. The sole investors in the Irish Master Fund
will be the feeders and they may invest directly in a
single pool at the Irish Master Fund level or in segregated sub-trusts, if the master is established as an
umbrella fund. The Irish Master Fund can also offer
multiple unit/share classes or series to the feeders.
• The Irish Feeder Fund and Non-Irish Feeder Fund
acquire units/shares in the Irish Master Fund, which
fluctuate in value in accordance with the performance of the assets at the Irish Master Fund level.
The liquidity at the level of the feeder funds and the
Irish Master Fund level can be matched.
“Ireland’s reputation as the premier domicile in Europe for the establishment of regulated
alternative investment vehicles has long been recognised by fund managers”
(d) Irish Funds may not grant loans, though there are so
many exceptions to this rule as to make the rule virtually
redundant. For example, a QIF may acquire a loan, may
acquire a debt security (including a promissory note or
other securitised loan), may make deposits, may enter any
kind of derivative or may enter into reverse repo agreements.
(e) Borrowing and leverage are not subject to a regulatory limit.
QIFS FOR MULTI-JURISDICTIONAL DISTRIBUTION
For fund managers seeking a global marketing solution,
particularly involving US investors, one way of structuring
the QIF for optimum distribution is to use a single Irish
‘master’ fund as a hub and then one or more ‘feeder’ funds
as this can optimise the tax treatment, which, for example,
US tax-paying and US tax exempt investors obtain from
an investment in the structure while at the same time
sheltering non-US investors from US tax risks and reporting requirements. With the dual aims of (i) providing US
taxable investors on the one hand and US tax exempt and
non-US investors on the other, with an optimal fund structure, and (ii) creating a structure that is as cost and operationally efficient as possible, a hedge fund that is to be
simultaneously offered inside and outside the US is generally structured as a master-feeder.
THIS STRUCTURE MAY TAKE THE FOLLOWING FORM:
• An Irish single or umbrella unit trust (the Irish Master Fund) authorised by the Central Bank as a regulated hedge fund. While other types of Irish fund can
also be used, an Irish unit trust can elect to “check the
box” (US Form 8832) to be treated as a partnership
for US tax reporting purposes.
• An Irish single feeder fund investment company or
unit trust (the Irish Feeder Fund) authorised by the
Central Bank as a regulated feeder fund. This vehicle is typically used to separate the US tax exempt
and other non-US (global investors) from US tax22 H F M W E E K . CO M
TAXATION
QIFs are not subject to any taxes on their income (profits)
or gains. No stamp duty or capital duty is payable on the
issue, transfer, repurchase or redemption of units/shares
in an Irish Fund. There are no Irish withholding taxes in
respect of a distribution of payments by an Irish Fund to
investors or in relation to any encashment, redemption,
cancellation or transfer of units/shares in respect of investors who are neither Irish resident nor ordinarily resident
in Ireland.
CONCLUSION
Ireland’s reputation as the premier domicile in Europe
for the establishment of regulated alternative investment
vehicles has long been recognised by fund managers, and
many have taken the opportunity to distribute their product through QIFs not only in Europe and Latin America,
but in the Asia Pacific region, the US and elsewhere.
The AIFMD offers increased marketing opportunities within the European Union, on a passportable basis,
enhancing the attractiveness of the Irish QIF, which is
AIFMD ready, for fund managers. The QIF is a regulated
product in a market seeking flexibility, speed to market
and global distribution, and has a proven track record with
transparency and investor protection, providing an answer
to the question of regulation in the alternative space. Q
Independence
p
Commitment
Expertise
-
Establishment of Investment Funds
UCITS Management Support
Service Provider Selection
Provision of Directors
MLRO Services
Liquidations
-
Investment Manager Start-up
Operational Oversight
Due Diligence Preparation
Fund Re-domiciliation
Infrastructure Review /
Development
LONDON
DUBLIN
NEW YORK
Phillip Chapple
Mike Kirby
Jill Paitchel
42 Brook Street, London
Fleming Court, Fleming’s Place
260 Madison Ave
W1K 5DB
Mespil Road, Dublin 4
New York, NY 10016
United Kingdom
Ireland
USA
Tel: +44 (0) 203 170 8811
Tel: +353 1 668 7684
Tel: +1 646 216 2103
[email protected]
Fax: +353 1 668 7696
[email protected]
[email protected]
[email protected]
www.kbassociates.ie