Regulated Funds In Ireland - A Safe Harbour For Turbulent Times

Author:Mr Mark White
Profession:McCann Fitzgerald
 
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Introduction

The global hedge fund industry is currently focused on finding a

means of recovery from the turmoil in the financial markets towards

the end of 2008, which saw many leading hedge funds suffer high

performance losses and record redemption requests, forcing funds to

restrict or suspend redemptions.

The consensus would appear to be that recovery in 2009 will

require a fundamental review and revision of the structures and

operations of hedge funds as well as where those funds might be

domiciled in future.

Across the hedge fund industry in the United States and Europe,

including the United Kingdom, the most consistently-forecast

development is the introduction of regulation for hedge funds and

their managers.

The establishment of a regulated fund in a well-recognised

jurisdiction offers considerable benefits to investors,

particularly in current market conditions. The objective of this

article is to demonstrate how, in the Irish environment, an

investment fund may be established which offers regulatory

protection to prospective investors without requiring the fund to

sacrifice its investment objectives and alternative strategies or

its dynamic and flexible structure. This article also explains the

significant taxation benefits which are available to investors in

an Irish regulated fund.

Benefits Of Irish Regulatory Regime

Ireland has established a highly regarded and well regulated

environment which serves a variety of fund types. Ireland offers

prudent but practical regulation of both retail and sophisticated

funds and this is considered to be one of the key reasons for the

success of the funds industry in Ireland.

The Irish Financial Regulator is considered flexible and

approachable and receptive to tight deadlines for fund

launches.

Many investors who wish to gain exposure to alternative asset

classes but do not want to invest in lightly-regulated

jurisdictions, such as Cayman or BVI, now appreciate that they can

gain exposure to such asset classes by investing in an Irish

investment fund authorised by the Irish Financial Regulator (an

"Irish Fund"). Furthermore, the investment fund structure

is increasingly being used to house other products, such as CDOs

and CLOs, which are having difficulty being launched as debt

products in the current market environment.

Fund Structure and Service Providers

An Irish Fund may be established as one of a number of legal

structures: an investment company, a unit trust, a common

contractual fund or an investment limited partnership. Funds are

most commonly established in Ireland as either investment companies

or unit trusts. A unit trust, for example, is often favoured by

fund promoters who are marketing funds to certain categories of

Irish, UK, US or Japanese investors. If an investment company is

chosen, it will be incorporated in Ireland as a public limited

company.

An Irish Fund normally does not itself employ staff, nor does it

have offices, but rather has its activities supported by service

providers. The primary service providers to an Irish Fund are its

investment manager, custodian and administrator. The Financial

Regulator requires that both the custodian and administrator are

based in Ireland. However, the investment manager does not need to

be based in Ireland and, in fact, the vast majority of investment

managers would be based outside of Ireland.

The role of the custodian, which is primarily to hold the

fund's assets in a secure manner, segregated from its own

proprietary assets, offers significant comfort to investors. The

Financial Regulator's Notices specifically require the

custodian to act in the interests of the unitholders in the funds.

The custodian will be directly liable to the unitholders for any

unjustifiable failure to perform its obligations or improper

performance of them. Such duties will also extend to the

custodian's appointment of any sub-custodians, which is of

particular importance to investors where assets are likely to be

held in various jurisdictions outside Ireland.

Retail Funds and Sophisticated Funds – UCITS and

Non-UCITS

A variety of factors influence the choice of fund structure and

type.

The most important factors in choosing a fund structure are the

profile and location of target investors and the proposed

investment policy of the fund. Each of these factors will be

extremely important in deciding whether to structure an investment

fund under either the UCITS or the non-UCITS regime.

Firstly, to look at the UCITS regime. The term UCITS stands for

Undertakings for Collective Investment in Transferable

Securities.

UCITS

The principal advantage of a UCITS fund is that, pursuant to the

UCITS Directive, once a UCITS is authorised in one EU Member State,

it can, through a "passport regime" be sold in other EU

Member States (subject to a limited registration process in other

relevant Member States) without requiring further authorisation

from that Member State in which the fund is to be marketed.

A recent Irish Funds Industry Association (IFIA) survey revealed

that UCITS account for 81% of the net assets of Irish-domiciled

funds. Given the challenging economic climate, it is reasonable to

assume that investors will be looking for a much greater focus on

governance, with more emphasis on transparency and risk management,

all features which the UCITS regime can offer. The investment

diversification limits imposed in the context of a UCITS are now

seen, not as inhibiting investment strategies but, in fact, good

marketing features. UCITS have effectively become the global brand

for retail investment funds around the world and Ireland has

established a reputation as an ideal home Member State for

well-serviced and well-regulated UCITS.

Not only is the UCITS the most popular fund product throughout

the European Union, many UCITS funds are also registered for sale

in a number of jurisdictions outside of the European Union. This

demonstrates the suitability of UCITS as the ideal global

distribution platform and confirms that the UCITS is now...

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