The primary driver for the SIF law was the strong demand from institutional and high net worth investors along with their asset managers, for a regulated onshore investment vehicle.
The SIF meets the demand of most investors by being a regulated investment vehicle providing investment managers with enough flexibility to deal with a wide variety of investment types, ranging from listed securities to hedge funds, commodities and real estate investments.
A Specialised Investment Fund (SIF) is a fund dedicated to “well informed and qualified investors” offering adaptability and risk protection. A SIF may invest in all asset classes and follow any type of investment strategy, but a fund is always subject to risk and diversification requirements.
The primary objective of a SIF is the collective investment of the funds raised from its investors, while applying the principle of risk diversification. The SIF law significantly simplified the rules for setting-up investment fund structures ranging from plain vanilla strategies to hedge funds, real estate and private equity funds and thus confirming Luxembourg as a domicile of choice for alternative investment products.
The SIF, as a regulated investment fund is straightforward to manage. Furthermore the regulatory requirements are particularly reduced, compared to other investment vehicles. Only the SIF itself, together with its directors as well as the service providers, such as the custodian bank, the central administrator or the auditors need to be approved by the Luxembourg Commission de Surveillance du Secteur Financier (CSSF).
Specilized Investment Funds benefit from a separate and more flexible statutory regime than UCIs, subject to the UCI Act 2002. In particular, SIFs are subject to relatively flexible risk diversification requirements. They may invest into an unlimited range of assets and implement an unlimited number of investment strategies. Specialised Investment Funds are exempt to translate their articles of association or any modifications of it into French or German, if these documents have been drawn up in English. In addition, SIFs are no more required to send their investors any copies of their annual reports by mail. Relevant updates of the fund documentation (i.e. articles of association and placement memorandum) will however be required in that respect.
The SIF law introduces a qualified and professional investor scheme. A fund created under the SIF law may only be sold to “well-informed investors”
A well- informed investor is:
The scope of eligible assets and investments is very large as indeed any type of assets can be integrated within the SIF and any type of investment strategies can be pursued. It includes but is not limited to: equities, bonds, derivatives, structured products, real estate, hedge fund and private equity investments. There is no detailed investment restrictions, nevertheless a SIF is subject to the principle of risk diversification.
Beyond the regulatory features, the overall tax burden of a SIF is exceptionally low and hardly any taxes are payable in Luxembourg. An annual subscription tax of 0,01% on the net asset value (which is lower than the subscription tax applied to most of other undertakings of collective investments) must be paid.
There is neither a corporate income tax nor a wealth tax payable. Moreover, non-resident investors are not submitted to a capital gains tax and management fees are exempt of VAT. There is a choice between tax transparent SIF (Fonds Commun de Placement, FCP) or non-tax transparent SIF (Company).
The primary objective of a SIF must be the collective investment of the funds raised from its investors, while applying the principle of risk diversification. The SIF may be structured as an open-ended legal entity (SICAV), a closed-ended legal entity (SICAF) or a contractual form (FCP) which must have a management company.
These different entities may create sub-funds following a different investment policy. The rights of investors and creditors of a sub-fund, which have arisen in connection with the creation, operation or liquidation of this sub-fund are limited to the assets of the sub-fund (i.e. Protected Cell Concept), unless a specific clause in the constitutional document refers otherwise.
A SICAV or a SICAF can be set up as a public limited company (SA), a partnership limited by shares (SCA, SCSp), a private limited liability company (Sàrl) or a cooperative organized as a SA.
The Luxembourg regulator issued a circular letter (07/309) containing guidelines on the principle of risk spreading and investment restrictions for Specialized Investment Funds:
In principal, a SIF cannot invest more than 30% of its assets or commitments to subscribe to securities of the same nature issued by the same issuer. However, this restriction does not apply to investments in securities issued or guaranteed by an OECD Member State or its local authorities, supranational institutions or organizations. Furthermore, it is not applicable to target UCIs, which are subject to risk diversification principles that are at least comparable to those relevant to SIFs.
Short sales may not, in principle, result in the SIF holding a short position in securities of the same type, issued by the same issuer and representing more than 30% of its assets. When using financial derivative instruments, the SIF must ensure, through an appropriate diversification policy of the underlying assets a comparable level of risk spreading. Similarly, the counterparty risk in an OTC transaction must, when applicable, be limited having regard to the quality and qualification of the counterparty.
The SIF law does not specify any detailed investment restrictions or leverage rules. It simply states that a SIF should apply the principle of risk diversification.
The CSSF may provide exemptions from these restrictions on a case-by-case basis. However, the CSSF may also request that additional restrictions are adhered to, in cases of funds with specific investment policies.