Alternative Investment Funds

Over the last 20 years Luxembourg has built up its position as the most popular domicile for undertakings for collective investments in transferable securities (UCITS). Originally created as a retail product, UCITS funds are offered to the public, but also to corporate and institutional investors. UCITS funds benefit from a European passport, may be easily marketed across the EU and beyond and have become one of the most successful globally accepted and trusted investment products.

 
At the same time Luxembourg has developed a strong track record in alternative investment products and bespoke investment structures such as hedge funds and funds of hedge funds, private equity vehicles and real estate funds.
 

  • Hedge Funds

 
In contrast to a number of offshore financial centres, hedge funds in Luxembourg are regulated products and subject to supervision by the CSSF.
 
 “Hedge funds” can be characterised by the following criteria:
 
  • use of alternative investment strategies;
  • use of short selling, derivatives and increased leverage;
  • pursuit of absolute returns, rather than measuring investment performance relative to a benchmark;
  • charging performance-based fees in addition to a management fee based solely on assets under management;
  • broader mandates than traditional funds which give managers more flexibility to shift strategy;
  • usually uses a prime broker that offers services such as custody of assets, trade execution, clearing and financing.
 
Whereas most Luxembourg alternative investment funds were in the past created as UCIs under Part II of the 2002 Law, the introduction of the specialised investment fund (SIF) in 2007 has successfully paved the path for a new generation of alternative investment funds for an international, qualified investor base. A convergence of traditional hedge fund products and UCITS products has also become noticeable as more and more alternative investment strategies are implemented under the provisions of Part I of the 2002 Law (UCITS).
 
The choice of legal form will largely depend on the investment strategy selected and the targeted investor base. UCITS are subject to tighter regulation and the implementation of alternative investment strategies within the UCITS framework must be in strict compliance with CESR guidelines. Thus, depending on their individual needs, promoters have the choice between more strongly regulated investment vehicles (UCITS and Part II UCIs) and more lightly regulated ones (SIFs).
 
More detailed information on eligible assets and risk diversification requirements is available in the UCITS section.
 
Our brochure Luxembourg Hedge Funds provides an overview of the different structures available.
 

  • Private Equity and Venture Capital Funds

 
Luxembourg today offers a platform of services and structuring opportunities to the private equity industry. Products include competitive structures for setting-up private equity and venture capital funds, such as the investment company in risk capital (SICAR) or the specialised investment fund (SIF), and structures for pan-European private equity and venture capital acquisitions. Luxembourg has thus emerged as a prime jurisdiction for the structuring of private equity acquisitions and financings.
 
With the implementation of a dedicated private equity and venture capital investment vehicle, the SICAR (investment company in risk capital - société d’investissement en capital à risque) in 2004, Luxembourg confirmed its commitment to the private equity and venture capital industries. Another common vehicle for private equity investments is the specialised investment fund (SIF).
 
Besides these lightly regulated Luxembourg “fund” vehicles, Luxembourg has built up its market share in private equity and venture capital funds thanks to its non-regulated special purpose companies (such as the SOPARFI - financial participation company) which are used for private equity acquisitions and financings alike. A SOPARFI is  typically used for holding and financing private equity and venture capital investments. It may thus equally serve as a special purpose vehicle, a joint venture vehicle or more rarely a private equity “fund” vehicle. The most important distinction between the SICAR/SIF/UCI and the SOPARFI is the lack of regulation or regulatory oversight.
 
The success of the SOPARFI stems from its ability to take full advantage of Luxembourg’s extensive double taxation treaty network with over 60 countries and its access to the domestic implementation of the EU Parent-Subsidiary Directive. Due to these features, SOPARFIs can thus be used as stand-alone (private equity and venture capital) acquisition, holding or financing vehicles or in combination with SIFs, SICARs and UCIs.
 
Our brochure Luxembourg Private Equity Investment Vehicles provides a detailed overview of the different structures available.
 

  • Real Estate Investment Funds

 
The market for real estate investment vehicles is constantly developing to provide investors with flexible and innovative real estate investment products. The growth in the number of real estate investment vehicles set up in Luxembourg has outpaced the European average and all current market indicators show that this trend will continue for the future. According to the latest available figures (2009), Luxembourg was one of the leading European domicile for vehicles investing in international real estate. 15 regulated Luxembourg real estate investment funds were launched in 2009, bringing the total number of real estate funds established and operated out of Luxembourg to 128 (150 units) with total net assets of € 20.9 billion.
 
The choice of a real estate vehicle will depend on the type of funding that needs to be raised, the proposed investor base, the type of investments to be made and any specific tax considerations. Real estate investment vehicles may be set up as unregulated or regulated scheme (i.e. subject to the supervision of the CSSF).
 

Regulated investment vehicles

 
Most real estate investment vehicles established in Luxembourg are undertakings for collective investment (UCIs). Real estate UCIs may be set up either in corporate form (i.e. Société d’Investissement à Capital Variable or SICAV and Société d’Investissement à Capital Fixe or SICAF) or in a contractual common fund form (FCP). A key determining factor in the selection of one of these structures is the tax regime applicable to investors.
 

Unregulated real estate investment structures

 
Real estate investment structures may also be set up by means of unregulated vehicles as Luxembourg resident corporations (sociétés de participations financières or SOPARFI).
 
Moreover a real estate investment scheme may be set up as a securitisation vehicle under the Luxembourg law of 22 March 2004 on securitisation as amended.
 
Our brochure Luxembourg Real Estate Investment Vehicles provides an overview of the different structures available.
 

  • AIFM Directive

 
In April 2009 the European Commission proposed a directive on Alternative Investment Fund Managers (AIFM) with the objective to create a comprehensive and effective regulatory and supervisory framework for AIFMs at the European level. The proposed Directive provides for harmonised regulatory standards for all AIFM within scope and enhances the transparency to investors and public authorities of the activities of AIFMs and the funds they manage. This shall enable Member States to improve the macro-prudential oversight of the sector and to minimize systemic risks. The proposal shall create a harmonized regulatory framework which contributes to the development of the European internal market.

 

 
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