Creating an investment fund abroad is one of the possible options for entering the international financial market. Before choosing a specific country for registering a foreign investment fund, it is important to analyze a range of factors that directly impact the choice of jurisdiction and fund structure. This includes not only the regulations governing international funds but also tax, corporate, financial, and commercial aspects.
What does the term "international investment fund" mean in essence?
"International investment fund" concept encompasses finances that distribute assets in corporations beyond the depositor's country of origin. Finances may take various formats: funds traded on the stock market, real estate funds, also mutual funds categorized as closed-end and open-end. They can be a gateway for private depositors to take part in global markets. While international investing carry inherent peril, they offer depositors a potential to vary their investment portfolios.
Currency with a fluctuating economics are some of the risk increasing elements. Money circulation is often an investment fear as fluctuations in exchange rates can impact the actual ROIs of portfolios. Changes in markets also require constant due diligence, as alterations in laws and regulations influence the economic models of markets in foreign countries.
Creating an investment fund: categorization
Foreign funds can be characterized as follows.
Categories of investment funds
Composition based portfolios
Investment Fund Structure
The management company is responsible for implementing the fund's investment strategy and managing its portfolio trading activities. To act as the management company, it is necessary to obtain a license in the country where the fund is registered. The administrator is responsible for calculating the Net Asset Value (NAV) per share. They handle all financial document processing, ensuring that clients have up-to-date information on their fund's investment performance and that the funds comply with all necessary legal requirements. The administrator's duties include comprehensive investor verification and the documentation of their rights to shares/units.
The custodian is responsible for formalizing the fund's rights to acquired assets and for safekeeping shares or other assets in electronic or physical form. The broker executes the purchase/sale of assets for the fund on behalf of the management company. The audit of the investment fund must be conducted by a licensed auditor. In many countries and types of funds, auditing is mandatory.
How to register an investment fund?
To register an investment fund, the process involves preparing a set of founding documents, appointing officers, and obtaining approval from the regulator in the chosen registration country for the fund's officers. These individuals may be subject to licensing or qualification requirements. Throughout the creation of the investment fund, the following documents will typically be obtained:
- Certificate of Registration.
- Protocols of appointment of officers.
- Investment Memorandum.
These documents collectively form the foundation for establishing and operating the investment fund.
The regulation of international funds, while varying from country to country, commonly involves strict control of the fund's activities due to their impact on the interests of third parties – the investors.
Benefits of creating a foreign investment fund
- Portfolio Diversification: Any investment portfolio can consist of a combination of high, medium, and low-risk portfolios. In a diversified portfolio, the risk associated with one high-risk investment is distributed and reduced. While a diversified portfolio cannot eliminate all the risks associated with a fund, it helps smooth the portfolio's returns during periods of economic uncertainty or downturn.
- Liquidity: Liquidity is a crucial element for any foreign investment fund. Liquid assets refer to securities whose shares can be sold for cash within a relatively limited period. Once the shares are sold on the stock market, the investor will receive the remaining amount equal to the purchase value at the market close. As the value of a foreign fund is directly dependent on the current market conditions, the value an investor can obtain after withdrawing funds may be higher or lower than the initial investment in foreign investment funds.
- Portfolio Management Expertise: Typically, investors lack the knowledge or experience required to manage a complex portfolio of assets. Therefore, portfolio managers are responsible for handling foreign funds. They monitor investments in the fund and make trading decisions on behalf of clients.
When registering an international investment fund, several risks may be encountered, including:
- Legal and Regulatory Risks: Varying legal frameworks and regulatory requirements in different jurisdictions can pose challenges during the registration process.
- Compliance Risks: Adhering to local compliance standards and ensuring that the fund structure aligns with the regulatory landscape of the chosen country can be complex.
- Operational Risks: Setting up a physical office, hiring local staff, and fulfilling substance requirements may increase operational complexities and costs.
- Market Risks: Understanding and adapting to the local market conditions, investor preferences, and economic factors is crucial for the success of the fund.
- Currency Risks: Fluctuations in currency exchange rates can impact the fund's financial performance and returns.
- Geopolitical Risks: Political instability, changes in government policies, or geopolitical events in the chosen jurisdiction may affect the fund's operations.
- Tax Risks: Navigating through diverse tax regulations and ensuring tax efficiency can be challenging, impacting the fund's overall financial health.
- Investor Perception Risks: Different markets may perceive foreign funds differently, and building trust among potential investors may require additional effort.
Creating mutual funds:
When choosing the structure of an investment fund and the country for a specific configuration, the question of licensing arises. Today, in most countries, obtaining a license is possible only after registering a local physical office and hiring local staff (i.e., meeting substance requirements). This involves expenses for rent, personnel, including an AML (Anti-Money Laundering) officer, compliance officer, and investment consultant. The registration period ranges from 6 to 12 months. This option is acceptable for companies with substantial capital, starting from USD 50 million.
To open an investment fund and obtain a license, companies with smaller capital can consider one of the following solutions:
Selecting the optimal country for registering an investment fund involves evaluating the existing legal framework in each jurisdiction, ensuring alignment with local legal requirements for your fund model, comprehending the tax conditions, and exploring available investment opportunities, among other considerations. Leading European countries for investment fund registration encompass jurisdictions like the United Kingdom, Liechtenstein, Luxembourg, and Switzerland.
It is considered a leading investment management center in Europe and the largest, most reliable, and prestigious investment management center globally. The regulation of international funds in the UK is overseen by the Financial Conduct Authority (FCA). The legal provisions provide protection for funds beyond the country's borders. Collective Investment Schemes (CIS) are an acceptable form of investment funds in the UK. Foreign investment funds in the UK are strictly regulated, and founders must undergo a thorough examination to comply with regulatory and qualification requirements.
This small state is popular among foreign investors. To register a foreign investment fund in Liechtenstein, it is important to adhere to European provisions, particularly the AIFMD and UCITS Directives. All investment funds in Liechtenstein are accountable to the Financial Market Authority (FMA). Investment funds based in Liechtenstein are required to have a compliance officer and an internal auditor as part of their organizational structure.
Creating an investment fund in Luxembourg involves several key steps within the country's well-established regulatory framework:
- Choose Fund Structure: Select an appropriate fund structure (SIFs, UCIs, UCITS, SOPARFIs) based on your investment strategy and target investors.
- Prepare Documentation: Define the legal form, prepare constitutive documents (prospectus, articles of incorporation), and create an offering memorandum.
- Appoint Service Providers: Identify and appoint essential service providers such as a management company, depositary bank, and auditor for regulatory compliance and operational efficiency.
- Regulatory Approval: Submit fund documentation to the Commission de Surveillance du Secteur Financier (CSSF) for regulatory approval, ensuring compliance with legal and regulatory requirements.
- Address Tax Considerations: Navigate Luxembourg's favorable tax environment for investment funds, ensuring compliance with tax regulations and leveraging available benefits.
- Launch and Compliance: Upon obtaining regulatory approval, launch the fund, and maintain ongoing compliance with regulatory requirements and reporting obligations.
As this country is not part of the EU, Switzerland's investment market is not subject to regulation by European directives. The local government has developed an efficient legal framework for regulating international funds in Switzerland. The primary regulator responsible for overseeing the activities of funds is the Swiss Financial Market Supervisory Authority (FINMA).
Creating a foreign investment fund in Asia, Australia, and the United States
Asian nations are actively broadening their investment horizons, providing foreign investors with the opportunity to establish an investment fund in either Singapore or Hong Kong, both distinguished as premier global financial hubs. Additionally, investors can leverage attractive tax incentives available in these jurisdictions.
The United States extends the privilege to non-residents to engage in investment activities. To initiate an investment fund in the U.S., prospective entities must submit a formal application to the Securities and Exchange Commission (SEC). Opting to register a hedge fund in the U.S. stands out as the widely favored choice among foreign investors.
The Australian Securities and Investments Commission (ASIC) oversees the operations of investment funds Down Under. In Australia, investment funds and their activities fall within the realm of financial services. Consequently, acquiring an Australian Financial Services (AFS) license becomes imperative for the provision of such services.
Thus, different requirements apply when structuring an investment fund abroad. The available legal structures for forming funds may vary depending on the country of registration. When regulating the activities of international investment funds, it is crucial to consider the laws of the investor's home country(-ies).
For consultancy services on registering foreign investment funds, you can turn to specialists at YB Case. Our company's experts provide not only consultations on the regulation of international investment funds but also offer support in the process of creating an investment fund in European, Asian, Australian, and U.S. jurisdictions.