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. Such alternative investment funds (AIFs) are for “well-informed” investors (institutional, professional, and qualified investors).
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 presented an opportunity for Luxembourg to create a brand in the alternative investment market, similar to the global brand it previously created with UCITS. The AIFMD introduced a European passport for alternative investment fund managers who wish to access the entire European market. Through the AIFMD, the European Union created 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.
Type of funds
The four main professional investment-structuring solutions in Luxembourg are:
- The SIF, which provides an operationally flexible and fiscally efficient multi-purpose vehicle that can be used for all asset classes,
- The SICAR, which is specifically designed for private equity investment and venture capital,
- The UCI Part II, a flexible but more regulated pooled vehicle,
- The RAIF, a non-regulated fund with quick time to market due to no regulatory approval necessary.
The SIF, SICAR and the UCI Part II are lightly regulated investment vehicles subject to approval and on-going supervision by the CSSF. The RAIF offers many of the same features as the SIF and the SICAR, but removes the double layer of regulation: only the manager is regulated - the fund itself is not. From a legal perspective, AIFs may take the legal form of:
- a public limited company (SA),
- a private limited company (S.à r.l.),
- a partnership limited by shares (SCA),
- a limited partnership (SCS),
- a special limited partnership (SCSp),
- a common investment fund (FCP).
Type of assets
Neither SIFs nor SICARs are required to comply with detailed asset limitations, investment restrictions or leverage rules. Nevertheless, a SIF must adhere to the principle of risk diversification, however, the CSSF may allow derogations on the basis of appropriate justification.
By contrast, a SICAR may concentrate its holdings into one project, the only requirement being to invest in risk capital.
The most recent addition to the Luxembourg fund toolbox is the RAIF, which is not subject to any regulatory approval by the CSSF, permitting a significantly enhanced time-to-market for new fund launches, a feat especially appreciated by private equity and venture capital fund initiators.
The UCI Part II exists for promoters of funds that do not meet all the criteria for a UCITS but which are substantially regulated and therefore also accessible to retail investors in Luxembourg.
All 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 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.