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      Alternative Investment Funds

      By the term "alternative funds" is meant all investment funds that are not already covered by the European Directive on Undertakings for collective investment in transferable securities (UCITS). This includes hedge funds, funds of hedge funds, venture capital and private equity funds and real estate funds.

      As one of the first European countries, the Luxembourg Parliament adopted the law transposing the Alternative Investment Fund Manager Directive (AIFMD) into Luxembourg law on 10 July 2013. The law relating to investment managers of alternative investment funds was published in the Memorial A N° 119 on 15 July 2013. This presents an opportunity for Luxembourg to create a brand in the alternative investment market, similar to the global brand it has created with UCITS. The AIFMD involves the introduction of a European passport for alternative investment fund managers who wish to access the entire European market. Through the AIFMD, the European Union is creating the first regulated environment for alternative investment funds worldwide.

      Moreover, the European Union acknowledged the need to overcome the existence of multiple fragmented national regimes by introducing a separate marketing passport regime under the Regulation on European venture capital funds (EuVECA) and the Regulation on European social entrepreneurship funds (EuSEF) respectively. These regimes could be used by managers of smaller private equity or social entrepreneurship funds which would consider the organisational requirements and transparency requirements deriving from the AIFMD as burdensome.

      Type of assets

      There are no legal restrictions on the type of assets in which alternative funds may invest, but the investment policy must be approved by the financial sector regulator, the CSSF. The regulator has established requirements regarding risk diversification, but these are less strict than for UCITS. UCIs established under Part II of the Law of 2010 and specialised investment funds (SIF) can adopt the same legal forms as a UCITS, that is:

      • a common investment fund (fonds commun de placement - FCP) which has no legal personality and must nominate a management company;
      • an investment company with variable capital (société d’investissement à capital variable - SICAV) in which the capital changes as a result of investments and redemptions;
      • a fixed capital investment company (société d’investissement à capital fixe - SICAF)

      Risk capital investment companies (société d’investissment en capital à risque - SICAR) cannot take a contractual form.

      The financial participation company (société de participations financières - Soparfi) is not regulated by the CSSF and often used for organising risk capital and private equity investments.

      These vehicles can be structured either as a "stand alone" fund with a single portfolio investment, or as a multiple compartment fund which, within a single legal entity, creates separate sub-funds (compartments) with different investment policies.

      Each legal entity and each fund compartment can issue an unlimited number of share classes based on the needs of the specific clients to whom the shares must be sold.

      A Luxembourg alternative investment fund which qualifies as AIF under the AIFM law and is managed by an AIFM based in the EU is eligible for a "passport" for sale in Europe.

      Luxembourg alternative investment funds are supervised by the CSSF.

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      Specialised Investment Funds (SIF)

      The principle characteristics of the specialised investment fund (SIF) are the lack of any constraints on the type of assets in which it can invest and a lighter supervisory regime.

      Since it may invest in any type of assets, the SIF is suitable for establishing anything from a traditional securities or money market fund to the creation of a real-estate fund, hedge fund or private equity fund. The SIF must have active portfolio management.

      Given the lower level of investor protection offered, SIFs are not designed for the general public but for sophisticated investors looking for maximum flexibility in order to give scope to their expertise and their specific needs.

      By "sophisticated investors" the law means institutional and professional investors, and any other person who can provide written assurance that he or she is a qualified investor and has either a minimum of 125,000 euros to invest, or an attestation from a bank, investment company or management company to certify that he or she has the necessary knowledge and experience to evaluate an investment in the SIF.

      Specialised funds have less strict publication obligations than funds destined for the general public and benefit from more flexible regulation of their activity. They are, however, obliged to put in place an effective system to monitor, measure and manage portfolio investment risk. They must also be structured so as to limit as far as possible the risk of conflicts of interest between the fund and its investors. There are also several conditions attached to the delegation of tasks to third parties.

      Like funds designed for the general public, the SIF must respect the principal of risk diversification, but the law does not set any quantitative limits on the fund’s investments.

      SIFs can be created as multiple compartment funds. They can issue an unlimited number of different share classes, which allows each fund and sub-fund to be designed to the needs and preferences of particular target investors.

      Like other Luxembourg regulated investment vehicles it is authorised and supervised by the CSSF.

      Hedge Funds

      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).


      The risk capital investment company, or société d'investissement en capital à risque (SICAR), was created by the Law of 15 June 2004 (as modified) to provide a tailored made vehicle for private equity and venture capital investment.

      A SICAR invests its assets in securities representing risk capital in order to provide its investors with a capital gain in return for the risk incurred. By investment in risk capital is understood the direct or indirect contribution of capital to companies with a view to their launch, development or listing on a stock exchange.

      The investments made by a SICAR are required to meet two critera: they must be opportunistic or high risk (which might be due to poor liquidity, since the company is not listed) and there must be an underlying intention to develop the company.

      The second criterion can be satisfied in many different ways, such as restructuring, modernisation, product development or by measures aimed at improving the allocation of resources.

      The law does not impose any investment diversification rules. Hence, a SICAR may focus its investments on one company operating in a particularly narrow sector such as biotechnology or geological prospecting.

      A SICAR may be incorporated in six different forms: a partnership limited by shares (société en commandite par actions - SCA), a private limited company (société à responsabilité limitée - Sàrl), a public limited company (société anonyme - SA), a  limited partnership (société en commandite simple - SCS), ), a special limited partnership (société en commandite spéciale – SCSp) or a cooperative company organized as a public limited company (société cooperative organisée sous forme de société anonyme - SCoSA).

      A SICAR may adopt an open ended or closed ended structure. The minimum capital depends on the legal form selected.

      Each of the legal forms creates a legal entity that is distinct from its investors. The name of the company must be followed by the acronym SICAR.

      A SICAR is entitled to create multiple investment compartments, thus permitting a private equity house to group different investment strategies, or meet the demands of different investors, within one legal structure.

      Typically, a SICAR has a limited lifespan and must identify the mechanism by which its shareholders can redeem their holdings in the company.

      Investment in a SICAR is limited to qualified investors.

      A SICAR is authorised and regulated by the financial sector regulatory authority, the Commission de surveillance du secteur financier (CSSF).

      Real Estate Investment Vehicles

      Institutional, professional and private investors interested in creating an international real estate portfolio will find a range of sophisticated investment vehicles in Luxembourg to meet their needs and specific preferences. The diversity and flexibility of these alternatives has made Luxembourg the premier European domicile for international real estate investment vehicles.

      A real estate investment vehicle can either be set up as a non-regulated entity (a commercial company) or as an entity regulated by the CSSF (for instance, a collective investment scheme). The choice will depend on the method by which capital is to be raised, the type of investor targeted, the investments to be made and particular tax considerations.

      Most Luxembourg real estate funds are regulated collective investment schemes, either set up as a company (a variable capital investment company - SICAV, or a fixed capital investment company - SICAF) or as a common investment fund (fonds commun de placement - FCP). Two other popular structures are:

      • the specialised investment fund (SIF), a collective investment vehicle designed for institutional, professional and sophisticated investors, and
      • the risk capital investment company (SICAR), a structure designed uniquely for vehicles active in the field of venture capital.

      Real estate investment vehicles constituted in the form of a collective investment scheme or a risk capital investment company can all adopt a multiple compartment structure.

      Non-regulated real estate investment vehicles can chose between four legal forms. Most frequently used are the public limited company (société anonyme - SA) and the private limited company (société à responsabilité limitée - sàrl). As commercial companies, they can benefit from Luxembourg’s double tax treaty network and the EU Directive on the tax regime applicable to parent companies and their subsidiaries.

      A real estate investment vehicle can also be constituted as a securitisation vehicle.