Each jurisdiction has its own unique attractions for a fund manager contemplating the launch of a fund. While Luxembourg is traditionally an attractive option due to its long-standing track record in the fund business, Malta and Switzerland have proved to be advantageous options for new collective investment schemes.
This article seeks to provide an outline of the differences between Maltese Professional Investor Funds, Swiss Alternative Funds and Luxembourg Specialised Investor Funds.
Structure and Capital Contribution at Inception
A Malta Professional Investor Fund (PIF) can be incorporated as an investment company with variable share capital (SICAV), an investment company with fixed share capital, a limited partnership, a unit trust or a contractual mutual fund. There is no requisite minimum capital to inject by the manager/promoter and no notary is required for incorporation.
A Swiss Alternative Investment Fund (AIF) can be incorporated as a contractual mutual fund or a SICAV. There is no requisite minimum capital to inject by the promoter and no notary is required for incorporation of a contractual mutual fund, while a minimum of CHF250,000 shall be injected if structured as a SICAV.
A Luxembourg Specialised Investment Fund (SIF) can be structured as a contractual mutual fund or a corporate SICAV. The SICAV may be a joint-stock company (JSC), a limited liability company (LLC), a partnership limited by shares or a cooperative company.
Should the SICAV be a LLC the manager/promoter will have to pay a minimum capital of €12,500 and if it is structured as a JSC, €31,000 at incorporation.
A Cayman fund is very similar to a PIF in terms of structure: no minimum capital and no notary are required for incorporation.
Minimum Investment per Investor
Switzerland
Swiss AIF can be either structured for retail investors and/or accredited investors. In both cases, no minimum investment per investor is required. This gives more flexibility to create ETF or ETC listed on an exchange and actively traded on the secondary market.
Malta
This jurisdiction offers three different categories of PIF:
(i) A PIF for Experienced Investors, which requires a minimum investment and holding of €10,000 per investor;
(ii) a PIF for Qualifying Investors, requiring €75,000 per investor; and
(iii) a PIF for Extraordinary Investors, requiring €750,000 per investor.
Luxembourg
This jurisdiction offers one category of SIF which requires a minimum investment and holding of €125,000 per investor or less if the investor is an institutional investor or receives a certificate by a financial institution certifying the adequacy of experience in high risk investments. Based on experience however, banks are reluctant to issue such certificates.
Eligible Assets and Investment Restrictions
The Maltese PIF opens up an extremely broad investment universe. No mandatory investment restrictions apply to PIFs targeting Qualifying or Extraordinary Investors. These two categories of PIF offer great investment flexibility. PIFs targeting Experienced Investors are however subject to some investment restrictions. In summary, a PIF for Experienced Investors may invest up to 20% of its total assets in securities, and up to 30% of its assets in money market instruments, from the same issuer. These limits may be increased to levels of 100%, 35% and 30% of its total assets, depending on the creditworthiness of the issuer. Investments in deposits held with a single body are capped at 35%. Direct borrowing for investment purposes and leverage via the use of derivatives is restricted to 100% of the net asset value. Some other specific rules also apply. A Swiss AIF must be diversified, but can leverage up to 600% of its net assets and enter into short selling arrangements. If the AIF is open to accredited investor only, the Swiss Financial Market Supervisory Authority (Finma) can grant additional flexibility.
In Luxembourg, the law of 13 February 2007 provides that a SIF must invest in assets ‘in order to spread the investment risks.’ In principle, a SIF cannot invest more than 30% of its net assets in similar securities issued by the same issuer unless the issuer is subject to equivalent diversification rules or is an OECD Member State or one of its public institutions. Short selling, derivatives and OTC transactions are subject to similar risk spreading rules.
Service Providers
While a Luxembourg SIF and a Swiss AIF require the appointment of a local administrator, a local custodian and an approved auditor, PIFs are much more flexible. The PIF can appoint foreign administrators and custodians. A PIF for Qualifying Investors and a PIF for Extraordinary Investors do not need to appoint a custodian per se. The fund can directly appoint a prime broker and only use a banker to operate the cash account (subscription and redemption account) of the fund. This is very beneficial for specific strategies and has a positive impact on the total expense ratio of the fund. With the enactment of the AIFM Directive these provisions of the law may be subject to amendment. A Swiss AIF can appoint foreign prime brokers.
Licensing and Running Costs
To issue the licence, the Maltese regulator charges €1,500 for an umbrella fund and €1,000 per sub-fund. In Luxembourg, the CSSF charges €5,000 to license an umbrella SIF. Finma’s fees amount to approximately CHF3,000-10,000.
It is difficult to assess differences between banking, custodian and administration fees between jurisdictions. However, audit fees are by and large most cost effective in Malta. While for a plain vanilla hedge fund, a big-four audit fee in Luxembourg would range between €15,000-25,000, and in the Switzerland between CHF10,000-15,000, the equivalent audit in Malta would range between €4,000-6,000.
Timeline and Regulatory Overview
Prior to launching the fund, an application must be submitted to Finma in Switzerland, which is deemed to be approved after four weeks of its receipt by the Finma for AIF. Finma may request amendments to the structure within 3 months as of the end of the deadline above. In practice the overall timing takes approximately three months. The CSSF in Luxembourg takes four to six weeks depending on the structure, the strategy and the manager. A case officer is delegated to analyse the risk and viability of the strategy and to understand the entire scheme. While the manager does not need to be a licensed entity to manage a SIF, the CSSF will try to evaluate its experience in investment management. The CSSF will also review the experience of the directors of the scheme. The directors of a SIF must be of sufficiently good repute and have sufficient experience in relation to the strategy of the fund.
The MFSA in Malta does a full review of the fund documentation and a complete due diligence (fit and proper test) on the manager if it is not already a regulated entity. It also runs due diligence checks on the directors and holders of founder shares. This due diligence includes a background and experience check. The licensing of a PIF by the MFSA would usually take two months. This timeline may be shorter if all players in the fund are already MFSA approved persons.
Each jurisdiction has its strengths and weaknesses. It is therefore important to conduct a careful evaluation of the following issues as some jurisdictions might offer a better solution, depending on the particular circumstances of the case: what investment strategy is sought to be employed? What investment restrictions? What level of leverage (by credit or inherent by derivatives)? What amount of assets? Where is the investment manager located? Is the manager regulated? Is the fund sought to be retail or non-retail? What minimum subscription amounts are envisaged? What redemption frequency? Is the scheme to be open-ended or close-ended? What liquidity is required for the fund and what frequency of calculation of the Net Asset Value? Where are the prospective investors located?
Dominique Lecocq
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