An investment fund is used to designate a pool of funds, that can be presented in the form of money, stocks, loans, tangible or intangible assets.
As a rule, one person, as well as a set of people, who sign, acquire or sell shares, can register an investment fund.
One of the defining characteristics of a registered investment fund is the fact, that it is most often managed by a fund manager, who, as a rule, is supervised by a national regulator, whose main function is to manage or advise on fund issues.
To date, there are many types of investment funds. You can order legal advice on the organization of an investment fund, as well as receive legal support in the implementation of your business project. Below are the most popular fund categories.
Categories of funds depending on the investor’s profit model:
This model is mainly characteristic in order to establish a private fund (private equity funds). For example, registering a private equity investment fund attracts investor money, when it is needed for an investment. Borrowing funds only if necessary, and not in advance in full, affects an increase in the internal rate of return of the fund (IRR), if it is measured in relation to the date of release or sale of a particular investment. The initial cost, as well as the profit or income from capital gains relating to each asset, is distributed among investors and is rarely reinvested. A registered private investment fund, as a rule, has a fixed period of existence, and the essence is to invest and then return all capital and profit before the created fund is liquidated. As a result, the establishment of an investment fund also involves a distribution of a share of profit between its managers.
The income from investments is usually distributed as they arise, for example, net income from real estate, an income from the rental of property, or the income from capital gains with fixed income. A fund of such a model, as a rule, is considered “closed”, and not “open”. This means, that a number of investors and the invested amount are fixed and have a fixed validity period.
A market model is mainly characteristic for the registration of a securities’ investment fund, in which stocks or shares of the fund are traded, as a rule, on a public market. A capital is not distributed among investors, although regular and larger one-time dividends may be paid. A profit, earned within the mutual fund, should lead to an increase in the prices of its shares. However, funds, that adhere to such a model, are subject to market costs, such as:
An organized asset management fund repurchases shares, owned by investors in the fund, and upon repurchase (or within a specified time) also pays investors any profits “tied” to these shares.
A share of profit is paid as a reward for the performance of a fund manager. Units are often redeemed at the net asset value (NAV) of this unit or are related to it. A unit NAV is a total amount of the fund’s gross assets less leverage and liabilities, divided by a number of shares in the fund. Usually NAV is calculated by fund managers. As a rule, for such a model, a registration of an open investment fund means, that a number of investors and the amount of investments fluctuate as the obligations of the investor are fulfilled and repaid, and can exist for an indefinite period, if the fund is not liquidated.
When choosing an implementation tool in the process of registering an investment fund, it is necessary to pay attention to a number of factors:
When planning to set up an investment fund, note that alternative assets can also be divided into two other types: illiquid, such as a private capital, a venture capital, real estate, and more liquid, such as listed securities, commodities and derivative financial instruments. This led to the development of two types of fund structure: open and closed.
A type of fund
An open fund
A vast majority of fund assets are sold within a relatively short period. An organized open fund has an indefinite duration.
Investors can redeem (in whole or in part) or increase their interest during the life of the established open fund.
Usually this is a large number of small assets (for example, quoted stocks) or assets, whose size can be easily adjusted (for example, derivatives).
Registering an open fund makes it possible to acquire new assets with additional investments. It finances the withdrawal of funds by investors through a partial sale of the assets of the fund.
A closed fund
An illiquid structure. A number of investors is usually fixed. As a rule, an investor, who wants to open a closed investment fund in Cyprus cannot leave it during its lifetime, since a fund is not able to liquidate assets to finance the exit.
Only investments are possible during the first half of the operation of a fund to give time for the release of assets. A larger asset means that up to a dozen funds can be invested in each fund.
A fund operates for a limited period, ceasing to operate after all assets have been sold.
Assets are kept for a minimum period (for example, to restructure a portfolio company).
Typically, fewer larger assets are held, such as portfolio companies or real estate.
A registration of an investment fund (as a partnership) usually requires the following documents:
This document contains the information about an organized fund, such as its investment objective and strategy, a summary of its conditions, the information about the management and its track record, as well as more detailed technical information such as risk factors, a summary of the tax consequences of investing and a detailed description of the restrictions in relation to the fund.
It is between a general partner and each limited partner. An agreement between partners is the main document, regulating partnerships, and it sets out in detail all the conditions of the fund. If you need the services of drawing up an investment partnership agreement, then IQ Decision lawyers with significant experience will help to take into account all the necessary essential conditions, that should be included in it.
This agreement is between a fund and its manager. It provides for the appointment of a manager and the circumstances, in which an appointment of a manager may be terminated. A manager either receives remuneration, for example, from an organized hedge fund, or receives remuneration from the general partner from the priority share of the profit of his general partner. In the latter case, an actual amount payable, as a rule, is not indicated in such an agreement.
As a rule, it is between the manager and investment advisor. Its content is similar to the Investment Management Agreement. It relates to the appointment, dismissal and remuneration of a consultant.
Each investor signs a stock subscription agreement, in accordance with which he agrees to be a related partnership agreement. If you would like to register an investment fund, then you should know that each investor provides the information about himself, as well as representations and guarantees in relation to himself, including a right to invest in a registered investment fund.
During negotiations, a manager can coordinate with investors certain issues, that are subsequently fixed in the partnership agreement (for example, specific reporting information, that is required by the investor). Such agreements with individual participants are set out in cover letters with relevant investors.
IQ Decision lawyers provide legal drafting services for registration of an investment fund in various jurisdictions.
Thus, opening an investment fund is a fairly comprehensive project, which includes many stages, that require a professional approach. IQ Decision lawyers have considerable experience in supporting the establishment of an investment fund in Luxembourg, a registration of an investment fund in Liechtenstein, the opening a fund in Cyprus, as well as in several other prestigious jurisdictions.
If you need expert advice on registering an investment fund in the EU, you can agree on the date and time of its holding at the contacts, listed below.
The information outlined in the article is actual at the time of its publication.
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