By hedge funds, we mean undertakings for collective investment that display some or all of the following characteristics:
- follow an alternative investment strategy;
- use short selling, derivative products and high levels of gearing;
- seek absolute performance rather than measuring their performance against an index;
- apply a performance fee in addition to the management fee that is based on assets under management;
- offer the fund managers much greater liberty to alter strategy;
- use a prime broker which, in addition to asset custody, offers order execution, clearing and financing services.
Luxembourg offers a variety of regulated and non regulated structures that can be used to set up a hedge fund. These are:
- undertakings for collective investment in transferable securities (UCITS), regulated by the EU Directive in this field, the shares or units of which can be sold to all types of investor;
- undertakings for collective investment under Part II of the 2010 law on UCI, which allows wider scope for investment;
- the specialised investment fund (SIF), reserved for use by informed investors.
The choice of structure will depend, among other things, on the type of investor to be targeted, the investment strategy and tax considerations.
Luxembourg hedge funds are authorised and regulated by the financial sector supervisory authority (Commission de surveillance du secteur financier - CSSF).