What is an investment fund?

What is an investment fund?

The investment fund is a financial company that makes collective investments precisely to extract the maximum possible benefit from the benefits of working as a group.

Mainly for this reason, an idea to register an investment fund (IF) is rapidly gaining popularity among wealthy people.

Advantages of setting up a private investment fund are the following:
  • The involvement of professional managers who can offer higher profits and risk management;
  • Reduced transaction costs;
  • Increased asset diversification to reduce unsystematic risks;
  • The ability to attract funds from third-party investors (with certain restrictions).
Also, it is worth noting that:
  1. The fund can make a contribution not only to one industry (construction or IT), but also to several different, unrelated (mixed) ones.
  2. The fund assets consist of units. Shareholders-investors first invest money/assets by buying this share, and after that they receive profit according to the share invested in the total investment volume.

If you are interested in creating your own fund, then we also recommend you to consider the opening of a charitable foundation.

Types of a private investment fund

There are several types of funds, which are divided according to different criteria. As for the risks, the reverse side of which is profit, we can talk about the most popular of them, such as mutual funds, hedge funds and ETF funds.

If you are intended to open your own investment fund, please note that there are two main types of such structures:

  • Open-end fund, in which shares can be bought freely and at any time;
  • Closed-end, in which shares are acquired exclusively at their creation and are sold freely.

The structure of an investment fund created in different jurisdictions is usually similar. For example, if you decide to register an investment fund in Switzerland, it will include the same basic elements as if you would like to open an investment fund in Latvia.

By the way, another type of IFs classification is the place of its registration. The so-called “peg” of your fund to a specific jurisdiction, where the management or the administrator of the fund will be located.

The international monitoring conducted by YB Case team showed that one of the modern world practices is the unification of investment fund parameters. Accordingly, in order to open an investment fund in Cyprus, it will be necessary to go through the same basic steps and fulfill almost the same requirements as if you decide to register an investment fund in Liechtenstein.

We draw your attention to the fact, that all of the above jurisdictions are the most legally protected for the creation of such financial institutions.

Whatever official name your investment fund has in any country in the world (these names may differ), the essence, like the organizational structure, remains one: it will always be an IF.

The structure of an IF:
  • The owner or promoter of an investment fund, (founder/group of founders), which, unlike investors, is capable of influencing fund policy;
  • Investors/"shareholders" which had invested the funds to manage them;
  • The legal company-lawyer responsible for document management;
  • Stock brokers;
  • The fund can be controlled by a management company (or local/your own) manager. The presence of a manager may be necessary if, for example, you will open an investment fund in offshore. In this case, you will need to obtain a license for this manager, because in tax-free zones exactly the manager is often responsible to investors according to local law;
  • Accounting and records in the register of assets (shares/securities) of the fund are maintained by the depositary/custodian, which can be either a bank or a licensed legal entity;
  • The registrar is a mandatory element of the fund’s structure – this is an organization that carries out the necessary transactions with the stocks of the fund and fixes them.
What is a mutual fund?

Mutual fund is the most popular type of IFs. It does not have such a status as a legal entity. So the right to dispose of all assets belongs to the same management company. And the operation of such a company is controlled and regulated by the owner of the fund and the state financial regulator.

The main stages of opening a mutual fund are the following:

  1. To consider the management principles and rules;
  2. To find your own investors which are ready to organize a fund. They are the ones who will own their shares in your IF;
  3. To determine who will act as a management company: a hired legal entity or created independently;
  4. To register a fund in the state of your choice;
  5. To choose a depository, where shareholders will place their assets. The main task of this depository is to monitor the legality of all transactions carried out with the assets.

You can register a mutual fund for the following purposes:

  • Fundraising;
  • Providing a maximum security (legal guarantees) for investors and their assets through the legal structure of the mutual fund;
  • Tax minimization/tax savings;
  • Incorporation of the fund in a particular business.

Separately, it is worth noting the specific benefits for the owner or beneficiary of the fund, such as:

  • Realization of large interesting projects at a higher financial level. Indeed, understanding how to open an IF, you create an instrument of so-called collective investment;
  • Increased external attractiveness of the fund as a financial instrument (packing your project in an IF shell);
  • The maximum reduction in the distance between financial resources and the owner of the fund. After all, if you offer a competitive and effective investment program or idea, it is much easier for you to interest a group of investors (fundraising).

Setting up a mutual fund is favorable for the following reasons:

  • Mutual fund is a powerful mechanism for building legal relations with investors. Indeed, in this case, their confidence in the assets safety is intended to protect both the legislation of the country of registration and its state financial institution that controls the activities of the fund;
  • Asset protection. Each commercial step of the fund will be checked by the guarantor – the depositary. In addition, investors/shareholders have the opportunity to coordinate all transactions with the assets of the fund before their implementation;
  • Tax savings. Closed-end mutual funds are often created to save on taxes, especially in the field of real estate. After all, if the assets are in the fund, the profit from any operations with them is not taxable;
  • Confidentiality. As a rule, regardless of jurisdiction, the list of shareholders/investors is not a list of founders. That is, this information is not public. Thus, you do not need to spend money on hiding your participation in the project as a beneficiary.
What is a hedge fund?

A hedge fund (a protected fund) is one of the types of collective investment activity. It can be called a partnership that combines the so-called main fund acting as the main manager and the investors contributing the funds.

Hedge funds are created to maximize the profit of investors and to eliminate the possible risks. At the same time, the hedge fund makes money regardless of market fluctuations by purchasing unpopular securities/securities, revaluing them and reselling them at a higher price.

As a profitable option, our experts propose you to register a hedge fund in Malta – in a loyal jurisdiction with favorable conditions for conducting international business.

The main differences between Mutual Funds and Hedge Funds:

Parameters

Mutual Funds

Hedge Funds

Securities

Standard: stocks, bonds etc.

All the same + goods, options and so on + short sales (an opportunity to earn when the market falls)

Payment for manager services

Depends on % of managed assets

(no hard incentive)

Depends on the real profit of the fund

(with a hard incentive)

Availability of manager's shares

Impossible

Possible

Methods and instruments

Standard (strict management)

Flexible (manoeuvring, a wide range of strategies)


There are 3 categories of hedge funds:

  • Funds working with the assets of certain companies around the world on a global basis after preliminary study;
  • Funds working on stock exchanges with revaluation of company assets;
  • Funds working in the markets of certain countries with data on domestic economic policy.

If you would like to open a hedge fund, remember one thing: stock market professionals believe that hedge funds investing is the most risky, although quite large hedge funds have existed for more than thirty years and continue to earn.

What is an ETF fund?

Exchange Traded Funds (ETFs) are funds which “work” on equity indices (actually index ones) or on precious raw materials (raw materials).

As follows from an analysis of YB Case experts, the average ETF fund is “more profitable” than mutual funds by about 0.8% per year. A mutual fund with its active management requires the investor to buy shares or invest in trust management. And in the case of a passively managed ETF, a unit can simply be purchased on the exchange and with a minimum commission.

In this article we do not consider the issue of how to create an ETF fund, due to its negative sides, especially the narrow field of specialization.

By contrast, the “standard” (managed) IF, even when it is an industry-specific one, in its package has shares from different market sectors. So, it is diversified.

Summarizing the information about ETF funds, it would be reasonable to take a closer look at the manageable investment options. Since, according to YB Case analysts, today in the global investment market there is no tendency for expanding the popularity of “passive” investments. On the contrary, the most attractive trend is an active cost minimization.

How to open an international investment fund?

Setting up a private IF is the easiest stage in the chain of steps of fundraising. In this case, you will need to carefully analyze the project, product indicators, competitive environment, marketing costs and implementation methods.

Obtaining a license of an investment fund can be a long and complex process. If you still decide to register an IF, our company will help you at every stage.

If you would like to obtain a license, please, consider the following:

  • Registration of a management company (open or closed joint-stock community, etc);
  • Providing a copy of the balance sheet;
  • Reporting (profit or loss statements of the company);
  • Providing information on the audit;
  • The receipts confirming the payment of all fees;
  • An application for a license;
  • A copy of the Charter (Memorandum of association);
  • Documents confirming the experience and qualifications of the fund employees.
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