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;
  • Typically use of a prime broker that offers services such as custody of assets, trade execution, clearing and financing.

Whereas in the past most Luxembourg alternative investment funds were created as Part II funds, 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. The RAIF structure allows hedge fund initiators to set up Luxembourg-domiciled hedge funds that are not subject to regulatory approval by the Luxembourg supervisory authority. This option permits the achievement of a significantly enhanced time to market for new fund launches.

The choice of legal form will largely depend on the investment strategy selected and the targeted investor base.