An investment fund is a type of collective investment scheme where all fund participants invest money together.
For those who have decided to set up an investment fund, there are a number of things one should be aware of before they pursue the process.
These factors need to be considered as they have a direct impact on your investments. More than just fund regulatory aspects, these factors include taxes, business operations and other commercial aspects.
Financial variables like funds are generally heavily regulated and there’s a significant legal liability associated with fundraising, investment strategies, investor relations etc.
Structuring a fund is known to be a very complex endeavor and one needs to consider key aspects associated with it. This also includes seeking professional and legal advice before setting up a fund.
What You Need To Know...
- Close Ended vs. Open Ended Funds
Close ended funds are usually the ones that are locked for a fixed long term, which means the investors cannot redeem their investments at the discretion of the fund manager.
On the other hand, funds that invest in liquid assets, (eg. publicly listed stocks or bonds) are considered as open ended funds. Open ended funds usually come with a periodic redemption and allow investors to issue shares on demand, whereas close ended funds generally raise a fixed amount of capital, have a fixed number of shares/units offered, and don’t issue new fund units on demand.
- Fund Managers
Depending on the type of fund and the jurisdictions associated with it, you’ll need to consider whether the fund is required to have a licensed fund manager or have a fund manager incorporated locally.
There are some jurisdictions in place that allows investors to manage their own funds while others are required to have a separate fund manager.
- Investment Restrictions
Investment fund restrictions apply to all sorts of fund categories or type of investors targeted in certain jurisdictions. Ideally, professional and private funds enjoy the investment restrictions as they don’t sell to retail investors.
Some funds don’t hold investment restrictions but are subject to borrowing restrictions, for example Jersey funds. Retail funds are the ones that face the highest investment limitations/ restrictions. For instance, in Hong Kong all the retail funds are required to follow the limitation of not holding more than 10% of the ordinary shares issued by the same issuer.
- Reporting and Compliance
Every jurisdiction is associated with different fund reporting standards to both the investor and to the regulator. They include periodic checks, audits, and statements of the Net Asset Value (NAV) of funds. Generally, funds are required to conduct compliance checks on and collect tax status self-certification forms from their investors. They’re also required to appoint Compliance and Money Laundering Reporting officers.
Always explore and compare jurisdictions side by side taking into account your unique investment strategies, target markets, requirements and priorities.
In a nutshell, there’s a myriad of factors and requirements to consider when one decides to structure their fund.
Capital markets are one of the most regulated sectors, and the legal liability associated with it is also significant.
Furthermore, you will not only have to consider laws and regulations of the country where your fund is domiciled, but also those from the country where your investors are located and even where your employees are.
A holistic and careful assessment of the strategies and objectives of the selected fund needs to be done before pursuing to structure it.