The following headings cover some of the key considerations in setting up a fund which will be structured or promoted as an unregulated collective investment scheme:
Tax structuring is likely to be the driver behind the decision on where the scheme should be based. This will be determined in part by who the investors are and where they and the assets of the scheme are located. If the investors are based in the UK, especially if they are CGT exempt (eg through a SIPP or SSAS), a UK partnership is likely to be tax efficient without needing to look offshore.
Some funds may consider offshore management to save on regulation however if the aim is to save on the ‘cost of regulation’, then the ‘cost of offshoring’ must be set against this. Offshore lawyers, accountants, managers and administrators are often more expensive than their fully regulated UK equivalents. It is also worth considering how investors will see the decision to operate off shore if it is perceived as an attempt to avoid regulation (and therefore avoid some of their protection). Do also bear in mind that UK regulations still apply to the promotion of funds based offshore if that promotion is undertaken in, or from, the UK.
Tax will again be important in determining the structure of the fund but assuming that the investors are principally based in the UK and include some CGT exempt investors and some tax payers, a typical structure would involve a Limited or Limited Liability Partnership (which is tax transparent) with a UK Unit Trust feeder (for the SIPP and SSAS investors). Various other vehicles might be used to achieve specific tax planning objectives such as allowing overseas investors to avoid withholding tax or allowing income to be rolled up into capital gains.
Establishing, operating and winding up an unregulated collective investment scheme is a regulated activity. This means, where the fund is operated (run) from within the UK, the person doing so must be authorised by the FSA. Some would-be fund managers become authorised directly, others employ a professional operator to run the fund on their behalf.
The decision on which route to take will depend on the experience available in-house, the size of the fund envisaged and whether it is likely to be one of many future funds. If the fund is small, a one-off, or the fund manager lacks experience, the costs of becoming authorised and therefore having to buy in expertise, pay fees to the FSA, and maintain regulatory capital are likely to outweigh the costs of buying in a professional operator.
This activity covers a broad range of services from receiving and processing subscriptions (which can be regulated) to producing call notices, effecting transfers, paying distributions, maintaining statutory books and registers, and issuing updates to investors (which are generally not regulated). Professional administrators have the expertise necessary to deal with administratively complex funds like hedge funds but others which trade only occasionally or which do not permit transfers or redemptions of their units may be easier to administer in-house. Once the fund is up and running, certain communications are laid down by regulations and advice may be required on how these should be put together.
Again, the need for an external accountant will depend on the complexity of the funds’ activities and the commitments made to investors about when financial information will be circulated. Simple funds can be accounted for in house, while complex funds may need experienced personnel, specialist systems and a good understanding of models of returns and carried interests.
Within (and from) the UK, the promotion of unregulated collective investment schemes is very tightly restricted. This is an area which many funds overlook in their planning but it is, of course, vital to achieving a successful launch. Every fund needs a clear route to market and a strong offering to both investors and intermediaries.
Most funds will prepare an IM; great care (and good advice) should be taken in ensuring that the IM appropriately addresses the workings of the fund, the financial model, the parties involved, and (perhaps most importantly) the risks it carries. Even if the IM is not going to be issued or approved by an authorised firm, having it verified by an experienced advisor might be very useful and save considerable cost in the long run.
In some cases, the IM may need to take the form of a prospectus which is a much more tightly prescribed document and, if this is the case, the cost of preparing it may be considerably higher. Whether this is necessary will depend on the strategy for promoting the fund, its overall size, its minimum investment, and the legal status of the fund vehicles involved.
Unauthorised promoters of funds may be able to use documents approved by an authorised firm but whoever carries out the promotion, the categories of permitted recipient are few and tightly defined. Great care must be taken to remain within these.
As well as the documents being used, attention must also be paid to whether the activity of promoting the fund is a regulated activity and therefore requires FSA authorisation in its own right. It is likely that promotions which do not involve authorised intermediaries will be extremely difficult to undertake.
Knowing the following information will be helpful in addressing the considerations above:
- What are the fund’s investments in? Asset class, location, &c.;
- Who are the investors? Individuals, institutions, pension schemes, location, &c.;
- How may investments will you receive? Minimum, maximum, total number, &c.;
- How may investments will you make? Frequency, size, &c.;
- Will you distribute income? Size and frequency of distributions, &c.; and
- What is your route to market? Are intermediaries authorised, where are they based, &c..
To discuss any issues related to launching a fund as an unregulated collective investment scheme, please contact Simon Webber, StypersonPOPE’s MD, on 07710 260 717 or firstname.lastname@example.org.