A Guide on Setting up an Investment Fund
An investment fund is a common pool of assets, put together by a large number of investors who choose to purchase assets, stocks, bonds or others. The fund is managed by a professional fund management company and is subject to the government regulations in the country in which it is based.
This is a flexible, advantageous and generally less-risky manner of investing, with a large number of opportunities to choose an investment fund that suits particular needs and interests. In return for their contributions to the investment fund, investors receive shares.
The investment fund can be open-ended or closed-end, with the majority being part of the first category. The open-end investment fund issues new shares as more money are added into the fund and redeems the shares and investors pull their assets out. They are priced once, each trading day. Closed-end funds are traded on an exchange and they only have a fixed number of issued shares.
What to consider before starting an investment fund?
Starting an investment fund will require a few steps, among which of key importance will be to properly incorporate and register the structure (company or limited partnership) with the relevant authorities and regulators in the country of origin.
Investors will want to research characteristics of the jurisdiction in which they will base their funds. Countries in Europe like Luxembourg have a traditionally strong and popular fund industry, with beneficial regimes and regulations. Other countries, take Malta, for example, offer many options for fund management providers. Some jurisdictions may be suited to some types of funds, for example, AIFs or Alternative Investment Funds in Luxembourg.
A common condition for setting up an investment fund, and one that is omnipresent in jurisdictions, is that the company or partnership that will act as the fund needs to be licensed and needs to receive approval from a state body. For example, starting a partnership or company in Thailand for the purpose of growing an investment fund will not be the same as starting the same type of structure in Europe.
Types of investment funds
Investment funds offer a wide range of investment opportunities, depending on the assets in which they are allowed to invest in and the number of investors who own and control shares in the fund. Common investment fund types include the mutual funds, the exchange-traded funds, and the hedge funds. The AIF, alternative investment funds, and the UCITS, undertakings for collective investment in transferable securities, are also options for investors.
The open-end fund or the mutual fund is a common type because they issue an unrestricted number of shares. It is a professional and low-cost manner in which investors can diversify their portfolio and the initial investment is an affordable one.
Exchange traded funds or ETFs are traded on exchanges and they are available for trading throughout a business day. They are similar to the closed-end funds and they offer an even higher level of flexibility to investors.
Hedge funds often make use of more complex techniques, both for the construction of the portfolio and for risk management. They target experienced investors and institutions.
The AIFs include hedge funds, real estate funds or private equity funds. Because they are more specialized, they are only marketed for professional investors. When or if they are also made available to non-professional investors, they are to be specially authorized and managed by an alternative investment fund manager.
The UCITS is a mutual fund based in Europe and this type of fund is marketed under a unifying EU regulatory scheme, meaning that it can be marketed across the EU. This can be a preferred type of investment fund for those entrepreneurs interested in opening a Dutch investment fund.
Steps for starting an investment fund
The investment fund can have a clearly defined business strategy and it is recommended to take the time to differentiate the investment platform from others on the market. For example, investment fund owners can target on an individual business sector or narrow down the addressed market.
Choosing the jurisdiction in which to incorporate the fund is an important step. Investors will commonly look for a good regulatory regime, stability, low tax regime, investor protection and other traits.
Investment funds can be set up in a number of ways but they will typically take the form of a private or public limited liability company or limited partnership. Some countries with a well-developed financial sector may offer differed approaches to the set up of an investment fund. In Liechtenstein, for example, investors may choose between several other legal forms, like the investment partnership of limited partners and they have access to asset-structuring options, as set forth by the Financial Market Authority.
Investment funds need to comply with a complex regulatory regime and the compliance requirements are even more complex for cross-border mutual funds. In Europe, the Alternatives Investment Fund Managers Directive or AIFMD is the law for the financial regulation applicable to hedge funds, real estate funds and other AIFs. Country-specific investment fund regulations are applicable throughout the world and in most cases, the regulations are in close relation to the relevant capital market laws and principles.
Investment funds are a facile and professional manner in which investors can gain access to a variety of assets. The information included in this guide is merely general counseling and cannot substitute professional investment advice.
We recommend that interested investors contact a team of hedge fund startup specialists, a fund management company or a team of lawyers who can provide adequate and more detailed information.
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