(文章只備英文版本)
Introduction
Traditionally, investment funds typically utilised an offshore vehicle in which to house the investment fund and, in most cases, the investment manager itself. The reasons why Luxembourg, Ireland and the Cayman Islands tend to be the favoured jurisdictions for investment funds (fund structures from such jurisdictions referred to as “Traditional Fund Structures”) are mostly because they have been at it longer, are more recognised and are more accepted by institutional investors without needing to “reinvent the wheel”.
Attributes of a flexible investment funds structure/regime (“Ideal Attributes”)
The ideal investment fund structure, at least from a fund manager’s perspective, would be created from bespoke legislation rather than under existing conventional companies legislation intended for all-purpose corporate entities that lack the necessary flexibility of an investment fund vehicle. While each fund manager has its own ideal “wish-list” of preferred attributes, typically, flexible investment fund structures would contain some, if not all, of the following, characteristics:
- have a variable capital structure tied to the fund’s net asset value – a fund’s capital should equal the value of its net assets, providing flexibility in relation to the distribution and reduction of capital;
- enable the segregation of investors, portfolios and assets for tax purposes, particularly where there are investors with different or special status such as tax obligations, investment horizons or professional/sophisticated categorisation so as to prevent “tainting”;
- enable commitments for different time periods and amounts to be provided for;
- have flexible investor entry and exit requirements and obligations;
- contain minimal (if any) risk-spreading obligations, diversification, or other restrictions on investment scope, such as the type and nature of assets that the fund may invest in;
- enable the use of different strategies across the investments;
- have the ability to “check-the-box” for U.S. partnership tax treatment as well as the ability to access as many different tax treaty benefits as possible;
- permit the flexibility to opt for the appropriate reporting framework to cater to the needs of its investors across different jurisdictions;
- allow investor and investment strategy confidentiality; and
- be sufficiently adaptable to, acceptable by, and easily distributable through, a “passporting” regime with as wide a network as possible (i.e., be capable of being “passported” as further described below under the following section titled “Relevance of passporting”).
Relevance of passporting
In determining the characteristics of a flexible investment funds regulatory regime, a key consideration is its marketability or attractiveness to investors. Even if a fund delivers positive returns, it becomes meaningless if investors are unable to invest in it, whether because of its strict internal compliance requirements, its location, insufficient investor protection or otherwise. However, if a fund manager can satisfy investors’ investment requirements not just in one, but numerous jurisdictions, this becomes a win-win situation for both fund manager and investor.
This is where fund “passporting” and “Passports” come in. It is a process commercialised by the European Union (EU) through the introduction of the Undertakings for the Collective Investment in Transferable Securities Directive (UCITS, which we also use in this article to refer to funds authorised under UCITS) for regulated mutual funds, and the Alternative Investment Fund Managers Directive (AIFMD) for alternative funds. These Directives essentially enable the marketing and sale of EU-domiciled investment funds managed by EU managers across all EU member states through a single product registration in one EU member state as opposed to a jurisdiction-by-jurisdiction approach so long as that investment fund or manager is authorised or regulated in an EU member state.
With the success of the UCITS and, to a lesser extent, the AIFMD regimes, Asian jurisdictions began to introduce their own fund Passports. In Hong Kong, the Securities and Futures Commission (SFC) worked together with its PRC counterpart, the China Securities Regulatory Commission (CSRC), to introduce a Mutual Recognition of Funds scheme (MRF) under which SFC-authorised funds in Hong Kong and CSRC-authorised funds in the PRC could be cross-sold in each other’s jurisdictions under a streamlined process. This was later used as the basis for the SFC to introduce similar MRF schemes with nine other jurisdictions, including Australia, Taiwan, Switzerland, France, the United Kingdom and Luxembourg.
Similarly, the ASEAN Framework for Cross-Border Offering of Collective Investment Schemes (ASEAN CIS framework) was launched in 2014 by geographically neighbouring countries, Singapore, Malaysia and Thailand, to enable cross-selling of locally authorised funds in each other’s jurisdictions. Separately, the long-awaited Asian Regional Funds Passport scheme (ARFP) was finally launched in February 2019, initially with Australia, Thailand and Japan followed by New Zealand in 2019 and South Korea in 2020. However, according to the official ARFP website, South Korea has yet to implement it, despite reports to the contrary.
In some cases, major institutional investors, such as pension funds require a Passport as a pre-requisite to investment. This is in part due to the regulatory restrictions placed on participants in a Passport structure, which are investor-protective in themselves, and the fact that funds regimes benefitting from Passports may carry brands (e.g., UCITS) that investors are familiar with and trust. For example, many investors’ internal compliance personnel are aware of and take assurance from the requirements for a fund to be accepted as a UCITS fund. Among other things, it will need to comply with the investment requirements under the UCITS Directive such as risk spreading and diversification, as well as be subject to enhanced transparency, risk management and liquidity requirements.
Further, Passports offer an opportunity to expand by establishing locally-domiciled funds targeted at local investors – especially in ARFP markets like Australia and Japan which are two of the biggest fund investor markets in the world.
For fund managers, a Passport makes entry less costly and cumbersome for managers who are new to the Asia-Pacific as they can enter local member markets through one market without dealing with the complex rules and requirements of each member country. Domiciling a fund in a single jurisdiction, which can provide access to other countries under a Passport, lowers those barriers to entry.
As such, choice of domicile will indirectly be linked to the viability of that domicile vis-a-vis the Passport that a fund structure located in such domicile will be able to access.
Popular investment fund jurisdictions
Whenever funds domiciles are considered, some existing jurisdictions will immediately come to mind.
UCITS vehicles
Luxembourg
Luxembourg has been innovating investment fund structures longer than most of the other investment funds jurisdictions and, as such, offers a variety of investment structures. The more typical investment fund structures, however, are the Luxembourg société d'investissement à capital variable (SICAV) (literally meaning an investment company with variable capital) which is similar to an open-ended fund and the sociedad de inversión de capital fijo or société d'investissement à capital fixe (SICAF), which is similar to a closed-ended fund. More recently, the reserved alternative investment fund (RAIF) was introduced. SICAVs and SICAFs tend to be the more commonly used UCITS-approved investment vehicles while the RAIFs were created in 2016 specifically for use under the AIFMD regime in Europe.
With 7.9% of the world’s investment fund assets domiciled in Luxembourg, it is the world’s second-largest investment fund domicile after the United States.1 Arguably, taking into account the fact that the US data is supported substantially by its massive US domestic investor base, the most globally accepted investment fund domicile. Luxembourg funds are often the jurisdiction of choice for funds targeting investors globally in the United States and Europe, as well as Asia.
Ireland
Since the late 1980s, Ireland has had in existence a variety of specialised legal vehicles within which investment funds may be structured. In 2015, Ireland introduced the Irish Collective Asset-management Vehicle (ICAV) as a “bespoke” corporate fund structure under its own legislation so that it would not be subject to the general Irish corporate legislation and accompanying company restrictions (such as the requirement to diversify assets and the need to obtain specific shareholder approvals for actions that would be required on a more regular basis for investment funds). The ICAV can be authorised either as UCITS or alternative investment funds under the AIFMD (AIFs), including the most popular Irish authorised AIFs – the Qualifying Investor Alternative Investment Funds (QIAIFs). As global regulators and fund managers become more comfortable with the Irish structure, it has become recognised and accepted in Asia, so much so that Irish funds are the third-largest domicile of choice for fund assets, with 6.5% globally and distributed in over 70 countries globally2.
Both Luxembourg and Ireland have long been favoured not just by European but also non-European fund managers (notably US fund managers focusing on global as opposed to US only fund-raising/investors), typically with a long-only strategy. This is because they are onshore EU funds that comply with the eligibility requirements for UCITS or, in relation to AIFs, have managers which comply, and ensure the fund complies, with AIFMD. UCITS, in particular, can be marketed to both retail and institutional investors whose internal investment compliance requirements require a regulated status since UCITS are subject to enhanced transparency, risk management and liquidity requirements. Meanwhile, an industry has developed within these jurisdictions with a depth of sophisticated and dedicated service providers such as custodians, depositaries and administrators catering to these investment funds and providing a one-stop shop for investment fund managers. Geographically, Europe and North America have traditionally had the highest concentration of investment capital and, therefore, a much longer history with investment structures, which has led to a high level of sophisticated investors in those jurisdictions requiring substantial investor protection standards which are rigorously governed by professional legal and compliance teams. At the same time, both domiciles have not just one, but several, investment fund structures that meet the necessary Ideal Attributes.
However, the precise reasons that make UCITS desirable to in-house legal and compliance gatekeepers (the strict controls on and requirements in respect of liquidity, concentration, eligible assets and derivatives exposure of such funds) result in a less attractive vehicle for alternative funds or institutional investors with a higher risk-appetite seeking better returns. The nature of the investment strategy will also be a major determinant – funds investing in public securities that are liquid are appropriate for a UCITS fund. However, a real estate fund, for example, would not be able to meet such requirements, in which case, an alternative fund structure may be more appropriate.
Cayman Islands
Among jurisdictions, where investors are not as tied to the UCITS brand, the Cayman Islands appears to have a unique position compared to the Luxembourg and Irish domiciles, particularly as an offshore domicile, valued for its English common law regime, confidentiality, flexible corporate legislation and tax-free status. Cayman unit trusts remain one of the most popular investment structures in Japan for Japanese institutional fund investors. Numerous Cayman Islands service providers now have offices in major Asian financial centres such as Tokyo, Singapore and Hong Kong, providing real-time assistance in Asia to clients.
The Cayman segregated portfolio company (SPC) has existed in at least one form or another since 1998, originally as a protective cell company to insulate insurance policyholders and insurance products, before expanding to other industries such as mutual funds and finance in 2002, long before segregated portfolios became an investment funds trend. The SPC is the closest equivalent to the Singapore VCC. However, more established jurisdictions like Europe have tended to view Cayman vehicles with suspicion as a tax haven. In fact, a number of institutional investors in Europe, such as pension funds, have investment policy guidelines that specifically prohibit them from investing in Cayman-structured products. Moreover, unlike Luxembourg and Ireland funds which are eligible for the UCITS and (if the manager is also EU-based) AIFMD Passports, the Cayman Islands is not a member of any Passport. The Cayman Islands joined the Organisation for Co-operation and Economic Development (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in 2017 and enacted laws in response to requirements for geographically mobile activities to have economic substance. While it served to bring the Cayman Islands in line with existing EU standards and OECD member obligations, it removed much of the flexibility that Cayman structures once provided, such as the non-necessity of having a physical presence to demonstrate "economic substance" in the Cayman Islands and the ability to hold any and all kinds of interests and securities without being subject to greater disclosure and presence obligations. This has resulted in the Cayman Islands losing one of the main distinctions and benefits it previously possessed over onshore jurisdictions such as Ireland and Luxembourg, while at the same time, not gaining any of the attendant onshore jurisdiction benefits that the onshore European jurisdictions had of funds in their domiciles being eligible for UCITS and AIFMD Passports.
As such, the use of Cayman Island funds in Asia for retail investors has been steadily dropping in recent years. As of 2023, Cayman Islands funds registered in Hong Kong for retail sales constituted only 1.6% of the total number, holding only 0.1% of the total net asset value of authorised funds in Hong Kong.3 While Luxembourg-domiciled funds continue to dominate Hong Kong’s fund industry with Ireland a distant second, both domiciles have seen a decline in their number and assets, while Hong Kong-domiciled SFC-authorised funds are now second only to Luxembourg-domiciled SFC-authorised funds.4