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
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
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
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
A variety of factors influence the choice of fund structure and
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
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...