UCITS, the flagship of Europe’s regulated investment funds
Luxembourg is a favoured destination for fund management firms, in no small part due to its long history of embracing regulation and creating products that enable firms to develop their business.
In particular, Luxembourg is the world’s acknowledged leader in UCITS funds. UCITS is the acronym for “Undertaking(s) for Collective Investment in Transferable Securities”, which were created in December 1985 by an EU Directive. They were fundamental in implementing a single regulatory regime across the EU for open-ended funds investing in transferable securities such as shares and bonds. Investor protection is at the heart of the directive which regulates the organisation, management and oversight of the fund and imposes rules concerning diversification, liquidity and use of leverage.
Importantly, investment funds that comply with the requirements of the UCITS Directive can be freely marketed, under the European passport, throughout the EU. This means that once established in one Member State, they can be distributed throughout the whole of the EU. This has reduced both costs and time to market, and increased the distribution capabilities of asset managers across the continent.
Although UCITS were initially intended only to be marketed across the EU, the UCITS brand is now recognised as the only truly globally distributed investment fund product. As a result, an increasing number of asset managers are establishing UCITS with a clearly defined global distribution strategy, and Luxembourg plays a key role in this strategy.
A growing number of countries in Asia and Latin America have accepted UCITS because they are convinced that the UCITS framework provides a stable, high-quality, well-regulated investment product with significant levels of investor protection. Luxembourg has successfully positioned itself as the global leader for cross-border distribution of investment funds, with the result that today two out of three UCITS funds distributed internationally are based in Luxembourg.
Luxembourg UCITS are distributed in 70 countries worldwide. The fact that Luxembourg was the first country to implement the first UCITS Directive into national law allowed it to attract many international fund promoters very early on. Today, Luxembourg UCITS are a strong global brand.
With the growth of the fund industry, specialised service providers offering expertise in fund administration, custody and distribution quickly developed in Luxembourg, which in turn attracted more fund initiators.
Today, Luxembourg is a centre of excellence for investment funds domiciled both in Luxembourg and abroad, with a skilled and multilingual workforce able to service funds sold in many different countries.
Regulated alternative investment funds
While Luxembourg is best known for its expertise in UCITS funds, it has in parallel developed extensive expertise in alternative investment funds. It offers bespoke structures for all the main alternative asset classes and investment strategies including:
- Hedge funds
- Funds of hedge funds
- Private equity and venture capital funds
- Real estate funds
- Loan funds
The EU’s Alternative Investment Fund Managers Directive (AIFMD) that entered into force in 2013 has created the first regulated environment for alternative investment funds worldwide – and has considerably transformed the way the global alternatives industry operates.
AIFMD offers the EU the chance to create a brand in the alternative investment fund market, similar to the global brand it has managed to build with UCITS.
The directive puts the Luxembourg financial centre, which is already well-established in the alternative sphere, in a strong competitive position to develop the hedge fund, real estate and private equity activities even further. For many years, Luxembourg’s alternative funds have been subject to specific regulation aimed at offering both a high level of protection to investors and a wide selection of flexible structures to asset managers.
Luxembourg’s fund industry and its regulator are thus well positioned to fully benefit from the opportunities offered by the AIFMD. A key innovation brought by AIFMD was the introduction of a European passport for alternative investment fund managers wishing to access the entire European market. Given Luxembourg’s position as the global leader in cross-border fund distribution, AIFMD has further strengthened its financial centre as a prime domicile for fund and management companies in the alternatives sector.
When transposing the AIFMD into national law, the Luxembourg government also introduced the limited partnership structure which should appeal to investors familiar with the Anglo-Saxon limited partnership model, and clarified the taxation of carried interest.