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Start Your Own Fund:
A Comprehensive Guide
European Investment Funds
Setting up a fund in Europe involves a series of regulatory, strategic, and operational considerations. Europe offers a diverse landscape for fund managers, with different countries presenting unique opportunities and challenges. This article outlines the key steps and factors to consider when setting up a fund in Europe.
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Exploring Offshore Funds
Costs of Starting and Maintaining European and Offshore Funds
1. Determine the Fund Type and Structure
The first step is to decide on the type of fund you want to establish, which can range from mutual funds, hedge funds, private equity funds, to real estate funds, among others. The structure of the fund (e.g., open-ended vs. closed-ended, regulated vs. unregulated) will depend on the investment strategy, the investor base, and the regulatory requirements in the chosen jurisdiction.
2. Choose the Jurisdiction
The choice of jurisdiction is crucial and should be based on factors such as regulatory environment, tax considerations, investor preferences, and the presence of service providers. Luxembourg and Ireland are popular choices for setting up regulated investment funds in Europe due to their favorable regulatory regimes, extensive double tax treaty networks, and experienced workforce.
3. Understand Regulatory Requirements
European funds are primarily regulated under the UCITS (Undertakings for Collective Investment in Transferable Securities) and AIFMD (Alternative Investment Fund Managers Directive) frameworks. UCITS funds are highly regulated retail investment products available to investors across the EU, while AIFMD regulates managers of alternative investment schemes, including hedge funds, private equity, and real estate funds. Compliance with these directives involves meeting strict capital, management, and operational criteria.
4. Engage with Service Providers
Setting up a fund requires the support of various service providers, including fund administrators, custodians, legal advisors, and auditors. These providers offer essential services such as fund administration, legal structuring, compliance, and financial reporting. Selecting experienced and reputable service providers is key to the smooth operation of the fund.
5. Draft the Fund Documentation
Fund documentation, including the prospectus, offering documents, and subscription agreements, must be meticulously prepared. These documents outline the fund's investment objectives, strategies, risk factors, terms and conditions, and investor eligibility criteria. Legal counsel with expertise in the chosen jurisdiction and fund type is essential during this phase.
6. Regulatory Approval and Registration
Once the fund structure is in place and the documentation is ready, the next step is to seek regulatory approval from the relevant national authority, such as the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg or the Central Bank of Ireland. This process involves submitting the fund's documentation for review and addressing any queries from the regulator.
7. Marketing and Distribution
After receiving regulatory approval, the fund can be marketed to potential investors. The marketing strategy will depend on the type of investors you are targeting (retail vs. professional) and the jurisdictions in which you plan to distribute the fund. Compliance with marketing and distribution regulations, including the AIFMD marketing passport for alternative investment funds, is essential.
8. Ongoing Compliance and Reporting
Once operational, the fund must adhere to ongoing regulatory requirements, including compliance monitoring, financial reporting, and investor disclosures. Staying abreast of regulatory changes and ensuring continuous compliance is vital for the fund's success and longevity.
Conclusion
Setting up a fund in Europe is a complex process. Success requires careful planning, a thorough understanding of regulatory requirements, and the support of experienced service providers. By considering the factors outlined above, fund managers can navigate the European fund landscape effectively and establish a robust fund structure that meets the needs of investors and regulators alike.
Which investment / trading strategies can be implemented with an AMC?
For example, with an Interactive Brokers managed account as the underlying of the AMC, the investment manager has access to a variety of assets and instruments for trading (at very low transaction fees). These include:
Stocks
Options
Futures
CFDs
Futures Options
Single Stock Futures (SSFs)
Exchange-Traded Funds (ETFs)
Exchange for Physicals (EFPs)
Currencies
Fixed Income (bonds)
Warrants
Funds
At iMaps Capital Markets we operate a two-tier structure for the launch of an Actively Managed Certificate (AMC). We set up a Segregated Portfolio of our wholly owned subsidiary Pecunia SPC which opens an account with the broker. The investment manager gets PoA (Power of Attorney) on that brokerage account via a Delegated Investment Management Agreement to execute the trading strategy. Our own structured products Issuer - iMaps ETI AG in Liechtenstein (Europe) issues Exchange Traded Instruments (listed AMCs) linked to that Segregated Portfolio.
Exploring Offshore Funds
Offshore funds can be an attractive alternative for investors and fund managers looking for flexibility, tax efficiency, and access to international markets. However, the suitability of offshore funds depends on the specific goals, risk tolerance, and circumstances of the investors and managers involved. Below are some key considerations regarding offshore funds:
1. Tax Efficiency
One of the primary advantages of offshore funds is their tax-neutral status. Jurisdictions like the Cayman Islands, Bermuda, and the British Virgin Islands offer structures that are typically not subject to local corporate, capital gains, or income taxes. This can be beneficial for investors looking to optimize their tax positions, though it's essential to consider the tax implications in the investors' home countries.
2. Regulatory Flexibility
Offshore jurisdictions often provide a more flexible regulatory environment compared to onshore jurisdictions. This can allow for a wider range of investment strategies and structures, potentially leading to higher returns. However, this flexibility may come with increased scrutiny from regulators and tax authorities in other countries, especially in light of global efforts to increase transparency and combat tax evasion.
3. Investor Privacy
Offshore funds traditionally offer greater privacy for investors, which can be a significant factor for certain individuals or institutions. However, global trends are moving towards greater transparency and information exchange between tax authorities, which may reduce this advantage.
4. Access to Global Markets
Setting up a fund offshore can provide easier access to international markets and investors, making it an attractive option for fund managers looking to attract a global investor base. This can also allow for diversification of investment portfolios.
5. Reputation and Perception
The choice of offshore jurisdiction is crucial, as some offshore centers have been associated with less rigorous regulatory standards and transparency. Choosing a reputable jurisdiction that complies with international regulatory standards is essential to maintain the credibility of the fund with potential investors and regulators.
6. Cost Considerations
The costs associated with setting up and maintaining offshore funds can be higher due to the need for specialized legal and administrative services. It's important to weigh these costs against the potential benefits of the offshore structure.
7. Compliance and Due Diligence
Offshore funds are subject to increasing levels of international regulation and scrutiny. Fund managers must ensure strict compliance with anti-money laundering (AML) and know your customer (KYC) requirements, among other regulatory obligations. The administrative burden of compliance can be significant.
Conclusion
Offshore funds can offer advantages in terms of tax efficiency, regulatory flexibility, and access to global markets. However, they also come with challenges related to costs, compliance, and changing international standards for transparency and regulation. It's crucial for fund managers and investors to conduct thorough due diligence and consider their specific needs and constraints when evaluating offshore funds as an alternative to onshore funds. Consulting with legal and financial advisors familiar with the intricacies of offshore jurisdictions is essential in making an informed decision.
At iMaps Capital Markets we list most of our AMCs as Exchange Traded Instruments (ETIs) at the Stuttgart Stock Exchange, currently the biggest exchange in the world for Actively Managed Certificates.
At present it features over 1.9 million publicly listed securities, making it the largest exchange-based segment for securitized derivatives in Europe.
Costs of Starting and Maintaining European and Offshore Funds
The costs associated with starting and maintaining both European and offshore funds can vary widely depending on several factors, including the fund's structure, size, strategy, jurisdiction, and the service providers involved. Below is a general breakdown of potential costs for both types of funds:
European Fund Costs
Startup Costs:
Legal and Advisory Fees: These can range from tens of thousands to several hundred thousand euros, depending on the complexity of the fund structure and the jurisdiction.
Regulatory Fees: Application and registration fees with European regulatory authorities can vary, but they might range from a few thousand to tens of thousands of euros.
Setup Fees for Service Providers: Initial setup fees for administrators, custodians, and other service providers can also add to the startup costs.
Annual Operating Costs:
Management and Performance Fees: These are typically a percentage of the fund's assets under management (AUM) and can vary widely.
Fund Administration Fees: These can range from 0.02% to 0.2% of AUM, depending on the fund's size and complexity.
Custodian Fees: Generally range from 0.01% to 0.1% of AUM.
Audit and Legal Fees: Annual audit fees can vary widely, and ongoing legal fees depend on the fund's activities and legal issues that may arise.
Regulatory Fees: Annual fees to maintain regulatory compliance can also be significant.
Offshore Fund Costs
Startup Costs:
Legal and Advisory Fees: These can be comparable to or slightly lower than those for European funds, depending on the jurisdiction and structure chosen.
Incorporation and Licensing Fees: These fees vary by jurisdiction but are generally in the range of a few thousand dollars.
Annual Operating Costs:
Management and Performance Fees: Similar to European funds, these depend on the agreement between the fund managers and investors.
Fund Administration Fees: Offshore funds might benefit from competitive administration fees, but this largely depends on the jurisdiction and the complexity of the fund.
Custodian Fees: Similar to those of European funds, depending on the custodian's charges.
Audit and Legal Fees: These are necessary for maintaining the fund and can vary based on the fund's operations and jurisdiction.
Registered Office and Director Fees: Offshore funds typically require a local registered office and sometimes local directors, which can add to the annual costs.
General Considerations:
The size and investment strategy of the fund play significant roles in determining overall costs. Larger, more complex funds with sophisticated strategies may incur higher fees.
For both European and offshore funds, economies of scale can reduce the impact of fixed costs as the fund's AUM grows.
Regulatory changes can impact costs, particularly in Europe, where regulatory requirements are subject to change.
Exchange rates and economic conditions can also affect costs, especially for funds that operate across multiple jurisdictions.
Given the variability and complexity of fund costs, it's crucial for fund managers and sponsors to obtain detailed estimates from service providers and consultants familiar with the specific type of fund and jurisdiction they are considering.
At iMaps Capital Markets the issuer risk is hedged. So, the underlying assets, for instance, Segregated Portfolio XYZ, serve the purpose as hedge and collateral for the respective XYZ ETI (listed AMC). In this respect, the underlying assets get pledged to a regulated private trust company, for the sole benefit of the program secured creditors being the respective ETI XYZ investors.