HOW TO START A HEDGE FUND IN THE EU 2012 ppt

FEATURING Dechert // Dillon Eustace // KB Associates // One Ten Associates
// Point Nine // Quant // Zammit & Associates Advocates
LEGAL ISSUES
Advice for start-ups in the EU
RECRUITMENT
Making the right hires at the right time
CONSULTANCY
Maintaining investor confidence
HOW TO START A
HEDGE FUND IN
THE EU 2012
WEEK
HFM
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HFMWEEK.COM 3
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HFM
HEDGEFUNDMANAGER
WEEK
ith just over 15 months to go until the Alternative
Investment Fund Managers Directive (AIFMD) is due
to be written into national laws, 22 July 2013, hedge
fund start-ups are coming to terms with the implications.
Intended to offer more stability and enforce greater
transparency to funds’ operations across the European
Community, the Directive’s stipulations may require more
time and financial resources in order to comply with it,
but the resulting opportunities for fund managers may
make it worthwhile if demand from investors increases.
This

HFMWeek
special report explores the key issues facing European start-
ups and what potential investors will be looking for. Setting up a hedge fund
infrastructure demands a good understanding of both the needs of the business
and those of the investors, and there are many different considerations to address
early on. The COO and compliance department will naturally have an important
role in making sure regulatory approval is obtained. Fund managers will have to
establish a viable business, showing the necessary controls and risk mitigation in
their infrastructure at the same time. As transparency and security become key
requirements, structural solutions such as managed account platforms (MAPs) will
be appealing to investors, and in addition, prime brokerage services will be looking
to assist those start-ups unable to afford the costs required to attract the attention of
the larger European prime brokers.
Ireland continues to be an attractive domicile, in particular due to its Qualifying
Investor Funds (QIFs), which already meet many of the requirements of the AIFMD.
Malta is coping with the increasing number of international businesses setting up
operations there with the Highly Qualified Persons Rules, introduced by the Malta
Government in 2011, which offer a favourable tax rate on employment income.
Therefore, choosing the jurisdiction which best suits a fund manager’s needs
remains as important as ever. Obtaining eligibility for Ucits space will also be
attractive to investors enticed by the prospect of open passporting rights within
the eurozone. Moreover, apart from meeting all the operational and due diligence
requirements, the ability to offer potential investors a unique opportunity one way
or another is just as important.
Richard Weston
REPORT EDITOR
W
HOW TO START A HEDGE FUND IN THE EU 2012
4 HFMWEEK.COM
CONTENTS

HOW TO START A HEDGE FUND IN THE EU 2012
LEGAL
GERMANY: TRANSPARENT INVESTMENTS
Achim Pütz of Dechert gives an overview of the benefits of a
managed account platform from the perspective of a German
institutional investor
PRIME BROKERAGE
HEDGE FUND IN A BOX, EVERYTHING YOU NEED IN
ONE PLACE…
Jerry Lees of Quant explains the important role of a Mini Prime
broker: to get you to market quickly, bypass set-up and regulatory
delays and raise funds
LEGAL
ATTRACTING THE ‘BEST OF BREED’ FOR MALTA’S
FINANCIAL SERVICES INDUSTRY
Andrew Zammit, chief legal officer of CSB Group, gives an outline of
the Highly Qualified Persons Rules, 2011
RECRUITMENT
START-UP HEDGE FUNDS
Mush Ali of One Ten Associates explains the different challenges
facing COOs of hedge fund start-ups
OPERATIONS
FLEXIBLE SOLUTIONS
Ambasuthan Jananayagam of Point Nine talks to
HFMWeek
about
why start-up managers need to be flexible during uncertain times
CONSULTANCY
HOW TO MEET INVESTORS’ EXPECTATIONS?
Phillip Chapple of KB Associates discusses some of the demands

of starting a hedge fund infrastructure
LEGAL
QUALIFYING INVESTOR FUNDS – THE REGULATED
ALTERNATIVE
Derbhil O’Riordan of Dillon Eustace explains Ireland’s benefits as
a regulated jurisdiction for alternative fund investors and fund
managers
06
08
11
14
17
19
21
6 HFMWEEK.COM
HOW TO START A HEDGE FUND IN THE EU 2012
D
uring the nancial crisis of 2008, many
hedge fund managers exercised their right
to restrict fund liquidity, using their fre-
quently underestimated legal powers to put
in place gates, suspend redemptions and
even segregate illiquid fund assets for years
in closed-end vehicles (so-called ‘side pockets’). Among
other factors, this resulted in a substantial deterioration of
liquidity for investors.
Single security deposit accounts held in trust – which
are known as segregated managed accounts – emerged
from the crisis as a favoured structural solution, as they

not only oer investors full transparency, but also an eec-
tive protection against the above-mentioned liquidity con-
straints. In a segregated managed account, the portfolio’s
liquidity derives from the liquidity set by the underlying
nancial instruments, rather than by conicting activities
of other investors who may force the hedge fund manager
to liquidate securities positions and thus take measures to
restrict liquidity.
STRUCTURAL SOLUTIONS
e experiences gained from the nancial crisis caused
Bayerische Versorgungskammer (BVK), the largest Ger-
man public pension scheme – with €50bn AUM – to carry
out an internal analysis of their existing hedge fund invest-
ments. is analysis indicated that it is reasonable for a
large investor such as BVK to invest in single hedge fund
strategies via managed accounts (MACs).
erefore, BVK decided to structure and launch its own
BVK-controlled managed account platform (MAP).
LEGAL STRUCTURAL OBJECTIVES
With regard to the legal set-up of the MAP, the following
objectives in particular had to be taken into account:
y BVK, as the managing and representative body of
twelve professional and local pension schemes (BVK
Pension Funds) wanted to ensure that the BVK Pen-
sion Funds are the sole eligible investors for the MAP
and the portfolios of dierent investment managers
(portfolio managers) to be integrated. e assets man-
aged by the portfolio managers should be held directly
by the respective sub-fund and controlled by the MAP
and its service providers.

y Any dependence on the MAP operator and other
service providers to the MAP should be avoided. In
the interest of the BVK Pension Funds, it should be
possible to replace these service providers as easily as
possible.
y It was necessary to safeguard the eligibility of the indi-
rect investments of the BVK Pension Funds under the
provisions of German investment law and insurance
supervision law.
STRUCTURING OF BVK MANAGED ACCOUNT PLATFORM
On the basis of the above structural objectives, it was
determined that the following legal structure – as a plat-
form vehicle – would be used: a Luxembourg Specialised
Investment Fund (SIF) pursuant to the Law on Special
Investment Funds dated 13 February 2007 (SIF Act), in
the form of a stock corporation (Société Anonyme – S.A.)
with variable capital (Société d’Investissement à Capital
variable – SICAV) (SIF SICAV S.A.).
e reasons for choosing a Luxembourg SIF include
its exibility regarding investment policy, the lean regula-
tory regime accommodated to such vehicles (supervised
by the Commission de Surveillance du Secteur Financier
– CSSF), as well as its possible classication as a foreign
collective investment scheme, from a German regulatory
perspective. e legal form of a Luxembourg stock cor-
poration was selected in order to set up an independent
corporate fund (rather than a contractually structured spe-
cial fund dependent on a management company), which
grants voting rights to its investors and is independent of
the integrated service providers.

Moreover, for eciency reasons, the SIF SICAV S.A.
was structured as an umbrella fund with several sub-funds.
e SIF SICAV S.A. has a central administrator and a
central custodian bank.
e MAP’s ongoing activities are co-ordinated and su-
pervised by a specialised service provider, the MAP opera-
tor, which has been integrated into the MAP by way of a
tailored service agreement. e MAP operator is respon-
sible, among other things, for the following:
y Legal and operational launch of the MAP and new
MACs on the MAP (as well as their liquidation);
y Legal and operational integration of fund infrastructure
into the MAP and the negotiation of service contracts;
y Initial and continuous operational due diligence of the
hedge fund managers and the fund administrator, the
custodian bank and the prime brokers, if applicable;
y Recommendation of investment guidelines for hedge
fund managers and negotiation of investment man-
agement agreements;
ACHIM PÜTZ OF DECHERT GIVES AN OVERVIEW OF THE BENEFITS OF A MANAGED ACCOUNT PLATFORM FROM THE PERSPECTIVE OF A GERMAN
INSTITUTIONAL INVESTOR
GERMANY: TRANSPARENT
INVESTMENTS
Achim Pütz
is a partner in Dechert’s
financial services group and
has extensive experience
in advising both German
and international clients on
traditional and alternative

fund structuring, structured
debt products and all
aspects of investment
strategy regarding complex
alternative structures.
HFMWEEK.COM 7
LEGAL
y Operative launch of commercial relationships
and negotiation of broker agreements with
prime brokers;
y Risk management, controlling and monitor-
ing of compliance with investment guidelines,
as well as examination of counterparty risks;
and
y Provision of online reporting, allowing BVK
to review any and all positions of the MACs
at any time.
BVK thus outsourced all middle oce and back
oce operations to specialised service providers,
without giving up the unrestricted control of the
MAP as shareholder, or the ability to replace the
service providers at any time, pursuant to the relevant
agreements.
LEGAL QUESTIONS
Within the structuring process, a number of specic legal
questions arose, the key issues of which are discussed as
follows:
PERMISSIBILITY OF AN INVESTMENT IN MAP UNDER
INSURANCE SUPERVISION LAW
e BVK Pension Funds are subject to state regulation,

which is largely in parallel to the regulatory framework
governing the investments of German insurance compa-
nies. erefore, it was necessary to structure the SIF SI-
CAV S.A. and each individual MAC in a way to meet these
regulatory requirements.
UMBRELLA VERSUS STAND-ALONE
An initial question regarding structure involved whether
the launch of one or several umbrella SICAV or the use
of a stand-alone SICAV would be advantageous for each
managed account with regard to the legal and practical
consequences. It was determined to select an umbrella
SICAV, primarily for reasons of practicability and pos-
sible cost savings. Since an umbrella SICAV is a single legal
entity (despite a basically unlimited number of possible
sub-funds), it can be managed under corporate law in a
more ecient way than a number of individual SICAVs,
each with an executive board, general shareholders’ meet-
ings, disclosure requirements, and so forth. In the case of
an umbrella SICAV, eorts to amend organisational docu-
ments would not need to be undertaken for individual
investment vehicles. e legal relationships with central
service providers can also be implemented and
later amended in a more ecient way and with less
documentation requirements.
is increased eciency should result in con-
siderable cost savings with increasing volume.
Furthermore, the launch of new sub-funds is easier
than the launch of a new SIF SICAV S.A. invest-
ment vehicle for each individual managed account.
A potential disadvantage to using an umbrella

SICAV might be increased liability risks due to
the umbrella structure. Any residual risks existing
in this regard were analysed for the United States
and the UK, which are eligible as potential (prime)
broker locations. Such risks were assessed as negli-
gible, provided that appropriate contractual ring fencing
protections are included in the relevant agreements.
INTEGRATION OF A CENTRAL INVESTMENT MANAGER
Another important issue to be resolved was the question
of whether the respective portfolio managers should be
directly instructed by the MAP as to the management of
the relevant sub-fund, or whether it would be benecial
to interpose the MAP operator and/or a group company
as a central investment manager to authorise the portfolio
manager within the framework of a sub-delegation.
During the discussions with the various platform opera-
tors it appeared, for a number of reasons, that the addition-
al assignment of the function of an investment manager to
a platform operator might not be practicable.
Furthermore, a benet of not having a central invest-
ment manager is that there is no risk that all sub-funds of
the MAP would be aected if a central investment man-
ager fails.
Accordingly, the MAP was structured without inter-
posing a central investment manager – since this was de-
termined to be more benecial in principle – provided
that adequate security mechanisms are implemented in
the contractual provisions with the MAP operator and the
portfolio managers.
e set-up of a proprietary MAP for investments in

hedge funds (and other asset classes) may considerably
increase the transparency and security of such assets
without causing higher costs for investors in the medium
term. ese investment solutions will likely continue to
make their way into the market for the benet of insur-
ance holders, pension fund contributors and/or other
end-investors. Q
THE SET-UP OF A
PROPRIETARY MAP
FOR INVESTMENTS IN
HEDGE FUNDS MAY
CONSIDERABLY INCREASE
THE TRANSPARENCY
”

8 HFMWEEK.COM
HOW TO START A HEDGE FUND IN THE EU 2012
T
he times they are a-changing”, to quote Bob
Dylan, and never more so than in the nancial
sector. Aer 2007’s crises (Lehman, Mad-
ho, Bear Stearns, MF Global and the col-
lapse of numerous hedge funds) we are faced
with a very dierent and complex market,
one more dicult than any of us have faced before. But,
as ever, troubled times throw up opportunities as well as
issues. For many who are now leaving bulge bracket rms
or who are in the process of seing up a new fund or prop
trading business, this is distinctly a time of opportunity
– but not one without risk. Even established mid-sized

hedge funds are being kicked out by their prime brokers
as unprotable, as they tighten their belts and command
huge minimums. But once again,
there is a solution.
ere is a real chicken and egg
dilemma to be faced. Because of
recent events, investors from all
levels of the investment commu-
nity have an understandable mis-
trust of unproven and untested
products. ere is no point in a
new fund coming to investors
with a plethora of historical back
testing. e investor won’t believe
you, and probably rightly so – I
have never seen an unprotable
back test. Equally, a track record
at a certain bank or fund is no
proof that you can do the same job
within the constraints of the new
entity and in the new market conditions, which are very
dierent now. So, how do you prove your track record
(while having only a limited initial investment) with-
out being brought down by costs and shunned by every
prime broker on the block because you are too small and
puny to maer? If you have tried, you will recognise the
phrase, “come back when you have $200m under man-
agement, but don’t bother us before”.
OVERCOMING HURDLES
How do you overcome these hurdles? You need to set up

a feasible, regulated entity with limited capital, which is
not overwhelmed by set-up and running costs. It needs to
get a reasonable deal for execution costs and potentially
some leverage, so that the trading strategy can be proven.
Meanwhile, it will take you more than 18 months to get
regulatory approval and will cost north of £200,000 to
set up the fund. You will need to get an operating busi-
ness in place and get regulatory approval before build-
ing your track record. At the same time, there are salaries
to be paid, compliance to be dealt with and oces to be
sourced and paid for. It doesn’t take much to realise that
this is likely to be a serious roadblock!
Besides these potential troubles, funds with less than
£75m in assets have diculty nding prime brokers. As a
small player, if they do nd a prime broker, they are oen
faced with high minimums, impossible nancing rates,
limited leverage, high brokerage
fees and second rate service levels.
In addition, the trouble with
seing up a new hedge fund or
prop trading business is that the
people who are most likely to
create eective trading strategies
– which produce the return and
create value – are oen the least
experienced in terms of running
a day-to-day business. ere is a
conict here: unless the business
is set up on sound operational
lines and with a solid understand-

ing of the operational constraints,
timescales and costs, there is lile
chance of the fund’s raising and
trading side succeeding. e rea-
son for this is that costs combined with timescale can
completely overwhelm the strategic business goal of pro-
ducing a viable track record.
WE CAN OVERCOME – A HEDGE FUND HOTEL BUT MORE…
Linear Investments and Quant Execution Management
Services (Linear/Quant) have been set up specically
to address the issues faced by the smaller hedge fund or
prop trading desk. e aim is to provide a menu of op-
tions to address all of the client’s needs. For some, the
fact that at Linear/Quant we can provide the full FSA
umbrella in weeks (with regulatory capital in place) and
provide access to a fund cell (prime brokerage plus capi-
YOU NEED TO SET UP A
FEASIBLE, REGULATED
ENTITY WITH LIMITED
CAPITAL, WHICH IS NOT
OVERWHELMED BY SET-UP
AND RUNNING COSTS
”

“
JERRY LEES OF QUANT EXPLAINS THE IMPORTANT ROLE OF A MINI PRIME BROKER: TO GET YOU TO MARKET QUICKLY, BYPASS SET-UP AND
REGULATORY DELAYS AND RAISE FUNDS
HEDGE FUND IN A BOX,
EVERYTHING YOU NEED IN
ONE PLACE…

Jerry Lees
is CEO of Quant and
chairman of Linear
Investments. As global head
of Alternative Execution
at CA Cheuvreux on the
executive board, Jerry started
and grew the Electronic
DMA, Synthetic Prime
Brokerage business initially
in Asia and then globally.
HFMWEEK.COM 9
PRIME BROKERAGE
tal introduction) at a stroke is a major opportu-
nity. But we go further in providing outsourced
desk execution, DMA access across global mar-
kets and instruments and a fully technologically
equipped trading desk platform in the heart of
London. Others may wish to select our prime
brokerage oering without the other aspects,
or just come to us for regulatory support while
they build a track record. It’s exible, the choice
is yours.
HOW DOES IT WORK?
On the prime brokerage side, Linear and Quant
consolidate ows and business from more than
60 clients, giving us considerable negotiating
power with global brokers and prime brokers.
Our assets under management and trading ca-
pacity are such that the smaller player is part of a big-

ger picture to the global or prime broker. rough con-
solidation and discounted pricing, we are able to pass on
these lower rates and fees to our partners. Oen it is the
case that no other prime broker will consider the smaller
hedge fund or prop desk in the rst place.
Within Linear/Quant Mini Prime, smaller funds pay
less for trading and get competitive pricing (with no
minimums) by taking advantage of our consolidated
flows and negotiating power. Linear/Quant provides
tailored prime brokerage services to start-up, small and
mid-sized hedge funds that are not serviced by larger
prime brokers in Europe. In essence, funds get better
servicing and pricing through our aggregated prime
broker relationship, as well as legal and administrative
support; day to day trading support and execution; and
an outsourced trading desk and DMA. It is effectively a
hedge fund hotel.
LINEAR INVESTMENTS – INCUBATION PLATFORM
Linear is set up to nurture all types of nancial
services companies who need to conduct regu-
lated investment business under the UK Financial
Services Authority (FSA registration 537389).
Incubation allows rms to establish a track record
and gain experience, as well as competency, while
building critical mass.
Individual FSA authorisation can be a long and
expensive process with a minimum nine-month
slog to gain FSA regulated status. Post-2008 regu-
lation for any size of nancial services rm is essen-
tial. From the client’s perspective it avoids puing

up excess regulatory capital, provides a strong op-
erational structure and allows for a short timeline
to be able to conduct business.
LINEAR/QUANT – MINI PRIME BROKER
e prime brokerage oering enables a hedge fund to uti-
lise Linear/Quant relationships with multi wholesale bro-
kers and a unique set of mini prime oerings. Mini primes
are viewed as an omnibus account aggregated to the prime
brokers, allowing your rm to benet from favourable
pricing and servicing from the prime broker.
In summary, the partnership provides operational sup-
port in seing up, legal, administration and regulatory ad-
vice. In addition, we provide an outsourced trading desk
and regulatory support such as compliance. Access to of-
ce space, trading and technology facilities is also an op-
tion in the context of a hedge fund hotel. With access to
multiple trading accounts, we provide one contact to track
the dierent accounts. In essence, we build an oering tai-
lored to your needs. Q
For further information contact Jerry Lees – CEO Quant
& chairman Linear Investments:
LINEAR/QUANT PROVIDES
TAILORED PRIME
BROKERAGE SERVICES TO
START-UP, SMALL AND MID-
SIZED HEDGE FUNDS
”

A successful
alternative investment firm

needs to grow its business
not its list of to-dos.
At Equinoxe, we understand the walk along the efficient frontier taken
by alternative investment managers like yourself. So when we administer
your account, you have seasoned professionals dedicated to your fund
and its investors. This experience, coupled with our bespoke operating
model and flexible reporting, lifts the weight of every administrative
detail from your shoulders and places it squarely on ours.

www.equinoxeais.com
Stephen Castree, , global
Chris Foy, , usa
Rod White, , bermuda
Alan McKenna, , ireland
Irfaan Hossany, , mauritius
HFMWEEK.COM 11
LEGAL
M
alta has aracted much media aen-
tion as an up-and-coming onshore
nancial centre, particularly since
the 2008 economic slowdown. It has
become widely acknowledged as an
EU jurisdiction where things get done
eciently and with the right balance between prudential
supervision and pragmatic regulation, enabling businesses
to develop lasting and meaningful relationships with their
regulators and beer business for the regulated operators,
while also oering a quality Mediterranean lifestyle with
a strong Anglo-Saxon work ethic. is development has

most recently been extensively covered by
Bloomberg

and the
Financial Times
, both of which have extensively
praised Malta’s virtues.
e surge in the number of international businesses
establishing some or all of their operations in Malta, par-
ticularly in the regulated industries of nancial services
and internet gaming, has created a marked shortage in the
supply of certain specialised skills within these industries.
ese growing pains have been managed by the Maltese
government through various initiatives including the in-
centivising of advancement into tertiary education and
ongoing training. However, besides such incentives, the
government has also acknowledged the value of aracting
additional human capital possessing the technical knowl-
edge and experience to advance these industries and se-
cure Malta’s position as a centre of excellence in the inter-
national nancial arena.
With this objective in mind, in 2011 the Malta Govern-
ment introduced specic tax rules targeted at highly quali-
ed persons performing particular functions within Mal-
ta-based operators duly licensed by the Malta Financial
Services Authority (MFSA) or the Loeries and Gaming
Authority (LGA). ese rules are contained in the Highly
Qualied Persons Rules, 2011 (HQP Rules).
e HQP Rules are eective in respect of income earned
by qualifying individuals in and from 1 January 2010.

THE PROPOSITION
In terms of the HQP Rules, a 15% at rate of tax would be
chargeable on employment income derived by duly qualied,
experienced and senior personnel holding an ‘eligible oce’.
is favourable tax rate applies in respect of such income up
to a maximum of €5m per annum. Any income in excess of
the €5m threshold is exempt from Malta tax altogether.
e ‘eligible oces’ enumerated in the HQP Rules are
the following:
• Actuarial professional
• Chief executive
• Chief nancial ocer
• Chief commercial ocer
• Chief insurance technical ocer
• Chief investment ocer
• Chief operations ocer
• Chief risk ocer (including fraud and investigations
ocer)
• Chief technology ocer
• Chief underwriting ocer
• Head of investor relations
• Head of marketing (including head of distribution
channels)
• Head of research and development (including search
engine optimisation and systems architecture)
• Portfolio manager
• Senior analyst (including structuring professional)
• Senior trader/trader
• Odds compiler specialist
CONDITIONS AND EXCLUSIONS

In general terms, anyone seeking to benet from the 15%
tax rate must satisfy all of the following conditions:
1. Derive employment income of at least €75,000
(exclusive of the annual value of any fringe bene-
ts and adjusted annually in line with the domestic
retail price index) which is subject to tax in Malta;
2. Be employed by a company licensed by the MFSA
or the LGA (as the case may be) to hold an eligible
oce in terms of an employment contract, which
is subject to the laws of Malta;
3. Satisfy the MFSA or the LGA (as the case may be)
that:
i. the relevant contract of employment relates to work
genuinely and eectively performed in Malta;
ii. they are in possession of professional qualications in
terms of the HQP Rules; and
iii. they perform activities of an eligible oce.
4. Declare and conrm, inter alia and in the pre-
scribed application form, that they:
i. are not and have not been domiciled in Malta and do
not intend to reside in Malta permanently;
ii. have not beneed from the special domestic tax
HOW TO START A HEDGE FUND IN THE EU 2012
Andrew J. Zammit
is managing partner of
Zammit & Associates –
advocates and chief legal
officer of the CSB Group,
practising company law,
financial services regulation,

hedge fund registration,
internet law and ship and
yacht finance.
ANDREW ZAMMIT, CHIEF LEGAL OFFICER OF CSB GROUP, GIVES AN OUTLINE OF THE HIGHLY QUALIFIED PERSONS RULES, 2011
ATTRACTING THE ‘BEST OF
BREED’ FOR MALTA’S FINANCIAL
SERVICES INDUSTRY
12 HFMWEEK.COM
HOW TO START A HEDGE FUND IN THE EU 2012
rules applicable in respect of investment services and
insurance expatriates with respect to relocation costs
and other expenses (under article 6 of the Income
Tax Act);
iii. are in receipt of stable and regular resources, which
are su cient to maintain themselves and the mem-
bers of their family without recourse to the social as-
sistance system in Malta;
iv. reside in accommodation regarded as normal for
a comparable family in Malta and which meets the
general health and safety standards in force in Malta;
v. are in possession of a valid travel document; and
vi. are in possession of sickness insurance in respect of
all risks normally covered for Maltese nationals for
themselves and the members of their family.
 e favourable 15% tax rate prescribed under the HQP
Rules would apply for a maximum consecutive period of
 ve  scal years in favour of EEA (including EU) nationals
and for a maximum consecutive period of four  scal years
in favour of third country nationals (nationals of non-EEA
countries).

It is important to state that the HQP Rules do not ap-
ply in respect of any person employed in Malta prior to 1
January 2008. On the other hand, an individual employed in
Malta on or subsequent to 1 January 2008 would be entitled
to bene t from the favourable  at tax rate, but the said bene-
 ts would nevertheless be limited to  ve years from the date
of commencement of the qualifying employment.  us, for
example, a Swiss chief investment o cer employed with
a Malta-licensed asset management company and having
a qualifying contract of employment in an ‘eligible o ce’
starting in 2008 (basis year) will be able to bene t from the
HQP Rules 15% tax rate for a period of three years – basis
years 2010 (the  rst year in respect of which the HQP Rules
became e ective), 2011 and 2012, – while a third country
national will bene t from one year less.
 e Rules also provide for certain circumstances that
would e ectively exclude the application of the favourable
LEGAL
15% rate, such as where the employer receives any direct
or indirect bene ts under certain business incentive laws,
or if the individual holds more than 25% (directly or indi-
rectly) of the company licensed and/or recognised by the
relevant authority, or if the individual is already in employ-
ment in Malta before the coming into force of the scheme
either with a company not licensed and/or recognised by
the respective authority or not holding an ‘eligible o ce’
with a company licensed and/or recognised by the rel-
evant authority.
 e Rules provide that any person abusively seeking to
claim bene ts under the Rules without entitlement may

face a penalty equal to the amount of bene t claimed
together with additional tax imposed at a rate of 7% per
month or part thereof.
REACHING OUT FOR THE FUTURE
With the HQP Rules complementing Malta’s  scal, pro-
fessional and infrastructural framework, international  -
nancial operators have been provided with an additional
incentive to consider establishing or expanding their
Malta operations. Operators already established in Malta
have the bene t of being in a position to a ract top talent
from within the EEA and beyond, providing prospective
employees with an a ractive net remuneration package. In
addition, operators looking for an alternative or comple-
mentary base for their operations may bene t from Mal-
ta’s a ractive corporate tax system and also facilitate the
relocation of sta falling into the eligible o ce categories
set out in the HQP Rules.
It is expected that the introduction of the HQP Rules
will inject new talent, knowledge and skill into the Mal-
tese  nancial services industry, further contributing to
the Government’s target to increase the country’s GDP
derived from  nancial services from the existing 12% to
20%. And with the continuing e orts being made, both in
the public and the private sector, to improve Malta’s inter-
national service o ering, this ambitious objective appears
clearly within reach.
Q
Bespoke cost effective mini prime brokerage
solution for small and mid sized funds.
www.linearinvestment.com | www.quantems.com

 Prime Brokerage Services
 Custodian Service Offering
 Full Execution Services
 Competitive Pricing
 Regulatory Umbrella
14 HFMWEEK.COM
HOW TO START A HEDGE FUND IN THE EU 2012
O
ver the last 12 months we have seen a sig-
nicant increase in the number of start-
ups in the EU, particularly in London.
Below are some of the questions we re-
ceive from our hedge fund start-up clients
and our responses to them.
Q: Our investors and regulators
expect more from us in terms of
governance, systems and pro-
cesses. To what extent can we en-
sure we have our bases covered?
A: e reality is the investors
want to be comfortable the COO
has the background to be able to
handle the increased complex-
ity of regulation, governance and
controls.
e good news is the COO can-
didate market has matured so their
experience and knowledge level of
the requirement is also demonstrated in what they have
performed for other funds.

One of the challenges in this area of hiring is the
perception that the COO has to be an ACA – it is
perceived that they have better experience to handle
the complexity of issues. In our opinion, it is the only
crude tool in place to make this judgment call, though
it shouldn’t be the only tool used
to judge a COO’s suitability,
and their practical experience in
where they are currently work-
ing and have worked previously
should be properly assessed
alongside a professional qualifi-
cation.
Q: Which roles are becoming of
increasing importance at a con-
temporary European start-up?
A: As discussed in the previous
question, the quality of the COO
THE QUALITY OF THE COO
HAS BEEN SIGNIFICANT
IN GETTING BOTH
REGULATORY APPROVAL
AND INVESTOR CONFIDENCE
”

MUSH ALI OF ONE TEN ASSOCIATES EXPLAINS THE DIFFERENT CHALLENGES FACING COOS OF HEDGE FUND START-UPS
START-UP HEDGE FUNDS
Mush Ali
is director at One Ten
Associates – a specialist

hedge fund recruitment firm.
He qualified as a chartered
accountant before starting
his career in recruitment
nearly 10 years ago. A
specialist in the sector, his
expertise lies in finding
“non-investment” talent for
the hedge fund industry
and service providers.
HFMWEEK.COM 15
RECRUITMENT
has been signicant in geing both regulatory ap-
proval and investor condence.
Alongside this, we have seen an increase in de-
mands on compliance and in-house management
of compliance, certainly when a fund looks at a
multi-jurisdiction fund, for example FSA and SEC.
At that point the need for someone with legal and
compliance knowledge is vital.
e outsourced compliance providers seem to
be doing an excellent job of supporting COOs
through this journey, but aer 12 months invari-
ably they realise they need someone managing this
full time.
ere is no exact answer to how this is managed,
but the hires around the infrastructure need to be able to
cope with a variety of expertise, from day-to-day opera-
tions to accounting, legal and compliance issues.
It is unrealistic to expect a COO to be an expert in all

these areas and invariably the COO will need a good op-
erations person. In recent times, this has seen demands for
a compliance hire, possibly part-time rather than full-time,
to cope with increasing demands in this area.
Q: Does it make sense to bring in a marketing/sales
person at the beginning?
A: We nd the reality is that the rst 12 months of a start-
up is about geing the performance and operational in-
frastructure to work. e marketing/sales person should
come in aer the rst 12 months because the reality is in-
vestors want to see a track record before considering due
diligence.
It should be a key hire for any CIO/CEO of a fund be-
cause it also makes the fund look more credible if someone
else is speaking to them about it rather than the
CIO/CEO himself.
Q: Are increasing regulatory/investor expecta-
tions decreasing the talent pool by increasing
experience requirements? Is this increasing the
cost of hiring suitable sta for start-ups?
A: It is absolutely true that we have seen a de-
crease in the qualied talent pool that investors
are demanding, but in turn we have not seen the
increase in the cost of hiring people follow a simi-
lar trend.
is may change, but the reality is hedge funds
are small businesses and quality candidates are not
as focused on the basic salary as they are about ensuring
they participate in the upside, and this is where CEO/
CIOs of funds need to be realistic and need to appreciate

the risk they are taking. ere are of course dierent tools
in place to achieve this when trying to aract the top-end
high-calibre infrastructure talent.
CONCLUSION
In conclusion, the challenge for start-up hedge funds is the
absolute need to bring quality non-investment talent. It is
more demanding now than it has ever been, and for two key
reasons: the infrastructure and regulatory demands of what
needs to be in place and the increasing inuence of the ex-
isting investors and perception of future investors.
However, one thing that has remained constant is that
both investment and non-investment professionals con-
tinue to be driven and motivated by the hedge fund sector
and that is what is amazing to see, despite the challenges
in the industry over the last ve years. Q
THE CHALLENGE FOR
START-UP HEDGE FUNDS
IS THE ABSOLUTE NEED
TO BRING QUALITY NON-
INVESTMENT TALENT
”

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OPERATIONS
HFMWEEK.COM 17
HOW TO START A HEDGE FUND IN THE EU 2012
A

consensus within the fund management
industry appears to be forming that in-
vestors should brace themselves for a
period of less than exciting returns as a
result of the prevailing macro-economic
headwinds.
Middle and back oce solutions, whilst less interest-
ing than contemplating the changing global dynamics, is
impacted by it and more importantly, the decisions that
fund managers make in this critical aspect of a fund’s in-
frastructure will determine their ability to navigate these
austere times.
DEMANDING INVESTORS
Investors have already reacted to the shiing balance of
power. Many fund managers will
confess that the investor commu-
nity, and in particular seed inves-
tors, are taking advantage of the
current climate.
Further, many fund managers
will admit that double-digit returns
seem unlikely in the medium term.
In such a climate, refocusing on
operational alpha (in particular
outperformance via cost ecien-
cies) is almost mandatory.
However, focusing on headline
direct costs alone isn’t prudent. Ex-
penditure on variable and indirect items can outweigh by
multiples the savings made on low-cost solutions.

THE VENDOR LANDSCAPE
In the post-crisis squeeze vendors’ margins have been
squeezed.
e fund administration industry is a pertinent exam-
ple. Minimum fees have been compressed to historical
lows and only the growth of Assets Under Management
(AUM) will result in increased protability. Analysts have
long predicted that the fund administration industry is
overdue for consolidation. A round of consolidation may
result in new strategies, such as refocusing on mid-tier
funds, at the expense of smaller funds.
e margin pressure is also impacting fund administra-
tors’ product oerings. Pre-crisis, many fund administra-
tors would have considered middle oce a synergetic of-
fering which made commercial sense.
However, in the current uncertain climate, expensive
middle oce expansions do not guarantee larger prots,
and some mid-tier fund administrators are opting for in-
dependent solutions.
Prime brokers and custodians are also reassessing their
oerings. e industry is refocusing its resources away
from start-ups, with the boutique investment banks seing
the trend and the large balance-sheet banks following suit.
Oering start ups free consulting and other services in
the hope of earning the fees back from trades and nanc-
ing agreements, seems to be making less business sense.
A recent Oliver Wyman banking survey concluded that
20% of revenues originating from 15 business lines made
no economic prot at all. e best returns came from just
8 to 10 business lines. “Before the crisis the biggest con-

tributor to (bank) return on equity was leverage, rather
than operating margin”, echoed the
Financial Times
’ Lex
column on 29 March. It was per-
haps inevitable that banks would
reassess all their business lines.
Prime brokerage divisions, like
other internal departments, will
need to demonstrate concrete rev-
enues from clients, regardless of
their size.
IMPLICATIONS FOR START-UPS
e result is an uncertain climate
for the start-up manager in 2012.
e temptation is to contain the
contracted xed costs of third-
party vendors. However, inexible solutions can have -
nancial repercussions when change is needed. Further, the
growth and performance of the fund will depend much
more on understanding the indirect and variable costs
too, which will eventually outweigh the xed costs by mul-
tiples.
It is critical to any business to curb xed costs. In the
middle oce space the spectrum of costs (and resultant
services) can vary quite substantially. In last year’s price
race to the boom the vendor market oered some star-
tling deals to high pedigree start-ups.
However, funds need to look beyond the headline pric-
es and consider their growth, which will vary based on the

complexity of the fund.
e variable costs of any fund will expand with growth.
e in-house operational and technology infrastructure
will grow with expanding instruments, new third parties
(prime brokers, custodians and trading counterparts) may
be needed and there will be evolving internal demands.
e indirect costs will also begin to spiral. As an example,
EXPENSIVE MIDDLE
OFFICE EXPANSIONS
DO NOT GUARANTEE
LARGER PROFITS
”

AMBASUTHAN JANANAYAGAM OF POINT NINE TALKS TO
HFMWEEK
ABOUT WHY START-UP MANAGERS NEED TO BE FLEXIBLE DURING
UNCERTAIN TIMES
FLEXIBLE SOLUTIONS
Ambasuthan
Jananayagam
is a partner at Point Nine
Financial Technologies, an
independent middle and
back office solutions provider.
He was formerly head of
Emerging Markets Credit
Derivatives for ABN AMRO.
18 HFMWEEK.COM
HOW TO START A HEDGE FUND IN THE EU 2012
simply rolling the FX forwards quarterly can cost

a fund as much as 40 cents in bid-oer costs (for
example $40,000 on a $10m, three month, EUR/
USD, forward contract). ese are hey costs given
the liquid nature of G7 FX forwards market.
e ability to incorporate collateral manage-
ment capabilities will permit direct dealing on
OTC derivatives with multiple counterparts and
can slash such indirect costs by over two-thirds.
is is one of many reasons funds set up indepen-
dent middle oce capabilities as soon as they can
aord to.
DUE DILIGENCE REMAINS STRINGENT
For its part, the investor community has main-
tained the stringent due diligence demands intro-
duced during the crisis. Taking into account the
ra of impending legislation, fund managers’ op-
erational hurdles have never been higher. Some of
the components of the checklist are having multi-
prime broker/custody arrangements, transparent
reporting including items such as counterparty risk (ideal-
ly on a daily basis), independent operations processes and
valuations, comprehensive disaster recovery procedures
and a string of other essentials.
Scandals like Mado have made some of these require-
ments non-negotiable. Aer all, if Mado had had inde-
pendent counterparty risk reports, investors would have
known exactly where their assets were held.
Further, a ra of new regulations are pending imple-
mentation over the coming years. e key to compliance
may lie within the operational infrastructure set up by the

fund manager from the outset. For example, if a fund can-
not view its positions in real-time across custodians (and
derivatives counterparts) and dierent instrument types,
it is unlikely that it will be able to comply with its risk re-
porting needs.
PLANNING THE LAUNCH
e fund management industry is clearly maturing. e
margins are geing tighter, and the barriers to entry are
geing higher. However, the fundamentals of a fund man-
agement rm remain fairly obvious.
Be conservative about revenues and growth:
Start-up managers need to recognise the chal-
lenging environment they are choosing to launch
in and allow for longer timetables for investors’
approval commiees to release funds and to po-
tentially launch with smaller commitments than
expected.
Keeping xed costs low: Ensuring that the fund
has accounted for the full spectrum of xed costs
that it will take to launch is rudimentary home-
work. ese costs measured against expected rev-
enues from fees on AUM will give some indica-
tion of how much ‘negative carry’ a fund manager
can be expected to endure, and provide a basis for
sound nancial planning.
Investor due diligence requirements: Inves-
tors are in the driving seat and so providing
them with transparency and meeting their due
diligence criteria are critical to growth.
Accommodating variable costs: ese are real

challenges in planning a funds infrastructure. In
the middle oce space, for example, variable
costs include everything from internal opera-
tions personnel (where an outsourced solution
is not complete or there is no outsourcing); the
technology resources and spend when there are
problems with the technology infrastructure; to
management time spent on dealing with these
‘engine room’ issues. e fund manager needs
to allow for changes in third parties, expansion
of requirements (for example collateral man-
agement, valuations, and so on) and changes in
the types of instruments traded. e last thing a
fund needs are crippling bills to change the as-
sociated infrastructure.
Minimising large indirect costs: A decision to
implement a low xed cost middle oce solution
can result in a less exible infrastructure. As the
fund grows, its dealing costs and funding cost
can become a multiple of its infrastructure cost.
is is a key reason funds develop independent
middle and back oce capabilities, as trimming
those indirect costs will result in genuine ‘alpha’.
CONCLUSION: BE PREPARED
2012 will continue to provide a challenging environment
for start-up managers. e key to managing the uncertain-
ty will be exibility. For middle and back oce that means
not necessarily choosing the cheapest available solution,
but a solution or solutions that will evolve with the fund.
Investor demands haven’t relented and so geing the

due diligence right and transparent reporting to investors
will remain important.
e direct costs will maer, but they should not preside
over the exibility necessary to grow the fund. Eventually
the indirect costs will become the biggest drag on perfor-
mance and implementing the optimal growth plan will be
the key to success. Q
THE FUND MANAGEMENT
INDUSTRY IS CLEARLY
MATURING. HOWEVER,
THE FUNDAMENTALS OF A
FUND MANAGEMENT FIRM
REMAIN FAIRLY OBVIOUS
”

OPERATIONS
CORPORATE GOVERNANCE
HFMWEEK.COM 19
HOW TO START A HEDGE FUND IN THE EU 2012
S
eing up a hedge fund infrastructure requires
a strong understanding of the business, as
well as the investors’ needs. Phillip Chapple,
executive director of KB Associates, gives
some pointers on how to ease the process.
HFMWeek (HFM): In recent months/years, have you
witnessed a growing interest from investors for start-
ups and why?
Phillip Chapple (PC): We have denitely seen an up-
take in the smaller end of the investment market, partly

because aer the 2008 crisis investors retracted from the
start-up space into the bigger safer options. But then inves-
tors came back looking for more interesting and smaller
funds, looking for an access to higher alpha opportunities.
HFM: What are the main challenges when starting a
hedge fund?
PC: Managers have to nd the
right balance between building a
viable business and demonstrat-
ing the requisite controls and risk
mitigation in their infrastructure.
It would be straight forward for a
manager with $70m AUM to build
everything that is required to meet
the level of investors due diligence
required by the average hedge fund
of fund. So the challenge for a start-
up is to work out in detail what are
the risks related to its strategy and
how to mitigate them while building a viable business. In
other words, the manager has to comfort the investor that
he knows what he is doing and that the risks they are buy-
ing are all in the strategy and not in the infrastructure.
HFM: How can start-ups aract an investor’s interest?
PC: e main thing is to start with an interesting alpha
proposition and this is the toughest part for a start-up.
Even though it is not easy, you can build an appropriate
infrastructure, you can set up all the operational require-
ments and meet all the due diligence requirements. But
you need to have a core alpha opportunity, which is well

dened and is of interest for investors. It certainly helps
if the strategy meets investors’ current mandate require-
ments. We spend a lot of time meeting with potential start-
ups just to try and work out if they are viable. We only real-
ly want to engage with people if we think they have a viable
opportunity that we can actually add value to by helping
them to build the appropriate infrastructure and meet an
investor’s due diligence requirements.
HFM: What are investors looking for when choosing a
start-up?
PC: ey are looking for some kind of exposure that they
are not going to get from a big established manager. So
they want to see unique selling points, they want the start-
up manager to have either some expertise, access, or any
other unique reason why the manager can oer something
dierent that sparks interest. Last year, for example, most
of the mandates were very much directed at ‘quant’ or sys-
tematic funds. Now, they are looking at macro funds and
idiosyncratic strategies, as long as the liquidity is still there.
For example, I’m currently working with a Chinese envi-
ronmental fund. Investors have understood that the main
risks in investing in Chinese environmental funds would
be local infrastructure and local
currency risks. But this particular
manager is focusing on only equi-
ties traded on the Hong Kong stock
exchange and seing everything in
dollars. So you have avoided the
two main risks and you have given
the investors a risk exposure they

are interested in. You need to have
those unique selling points that in-
vestors can see and that make them
want to buy that risk.
HFM: What are the key require-
ments from investors that constitute a challenge for a
start-up? And how can a start-up overcome these hurdles?
PC: One of the main challenges for a start-up manager is
a lack of transparency. Although the investors’ standards
have risen, it is quite rare to get eective feedback from
many of the investors, mainly because of how they are
structured. Investors are looking at a number of names
and trying to shortlist a few that they want to invest in.
Due diligence is in the main now performed before rather
than aer the investment decision. e main way to nd
out is to try to step back and take a realistic third-party
view of your oering, and try to identify all the risks in
both the product and the infrastructure, because that is
what a potential investor will look to do. Investors want
to understand the risks that make up the strategy but they
want to identify risks due to the infrastructure of the fund
or manager and to identify if any level of control is miss-
ing, for example around cash management, corporate
THE MAIN THING IS
TO START WITH AN
INTERESTING ALPHA
PROPOSITION
”

PHILLIP CHAPPLE OF KB ASSOCIATES DISCUSSES SOME OF THE DEMANDS OF STARTING A HEDGE FUND INFRASTRUCTURE

HOW TO MEET INVESTORS’
EXPECTATIONS?
Phillip Chapple
is an executive director
of consulting firm KB
Associates. He has held
senior positions in both
the hedge fund and prime
brokerage industries.
Specialities include assisting
start-up hedge fund
managers and helping
managers prepare for
investor due diligence.
20 HFMWEEK.COM
HOW TO START A HEDGE FUND IN THE EU 2012
governance, insurance, the language in place with
your prime broker, who the prime brokers are and
if you have got the right liability in place with your
service providers.
e manager, more than anybody else, should
understand the risks around what he is doing and
should be able to properly explain them.
Once the manager understands what the inves-
tors are looking for, the challenge is to build the
control and the necessary infrastructure in a way
that meets the investors’ requirements and enables
him to run his business and be viable.
HFM: At KB Associates, how do you assist start-
ups to aract investors and meet their require-

ments?
PC: We project manage the full set-up for a manager. So
we help them choose their lawyers, their compliance advi-
sors, their prime brokers, their administrator and their sys-
tems. We are not just trying to select them, we look at the
operating procedures around each of those providers and
we help negotiate the Service Level Agreements (SLAs),
we look to build an operational infrastructure, which will
give comfort around the necessary controls and process
for the manager’s strategy, build the corporate governance
and then create the Due Diligence Questionnaire (DDQ).
We look at everything the manager needs, to make sure he
can pass due diligence.
HFM: What is the key point a manager should always
have in mind when starting a hedge fund?
PC: e manager always has to think in terms of how the
investor thinks and always has to try to take a third per-
son’s view of his product because in eect he needs:
• A reason for the investors to invest: it is not enough
to build a start-up and hope the investors will come.
e manager needs to have a distinctive proposition
for them.
• To look at every part of his oer and make
sure there are no inappropriate risk exposures.
If he doesn’t identify them, an investor may
pick them up and is unlikely to tell him about
it. It is important to read through every single
document. It might seem boring or he might
feel that he has paid other people to dra these
documents, but he has to understand all fac-

ets of his infrastructure, and if he doesn’t he
has to keep asking questions until he does. He
shouldn’t presume that everything is standard.
HFM: How do you see the future for start-ups?
PC: In terms of regulation, the AIFM Directive
will surely have an impact on start-ups, but we
have to wait for its full implementation to really
understand the full eects. e new regulations in the US
have already provoked some managers to avoid US inves-
tors for their funds.
In terms of the process of starting a hedge fund, I
don’t think the current trend of increasing due diligence
is going to ease up. As the investor base for hedge funds
becomes more institutional in nature, due diligence has
become key in allowing investors to gain comfort over
which risks he is taking. A positive for start-ups is that we
are seeing investors widen their investment mandates.
Managers have to be exactly in the investors’ mandate to
have any chance of raising assets. When those mandates
are widening, in eect more managers should t into the
mandate requirements so there are more strategies that
can aract investment. We also see an appetite from
many investors to source early stage managers due to the
higher alpha available in the early stages of a fund. It is
possible to get started now, as long as you have a dened
alpha proposition that meets the mandate requirements
of investors and you have an infrastructure that demon-
strates that all the risks are in the strategy and not the
infrastructure. Q
MANAGERS HAVE TO

FIND THE RIGHT BALANCE
BETWEEN BUILDING A
VIABLE BUSINESS AND
DEMONSTRATING THE
REQUISITE CONTROLS AND
RISK MITIGATION IN THEIR
INFRASTRUCTURE
”

CONSULTANCY
HFMWEEK.COM 21
LEGAL
A
s investors are seeking more security, trans-
parency and regulation, and as fund manag-
ers seek to broaden their distribution bases,
more and more managers are looking to reg-
ulated jurisdictions as alternative domiciles
of choice to traditional oshore solutions.
Ireland has long been considered the regulated jurisdiction
of choice for fund managers, oering exibility, expertise,
international brand recognition and a favourable tax regime
to the global funds industry for more than 20 years.
e European community has more recently moved to
provide a regulated solution for alternative funds with the
Alternative Investment Fund Managers Directive (AIF-
MD), which will become law across the European com-
munity by 22 July 2013. e AIFMD, which applies to any
so-called Alternative Investment Fund Manager as dened
in the AIFMD, oers a pan-European passport to compli-

ant Alternative Investment Fund Managers (unless a partial
or complete exemption applies or
the activities in question fall outside
the scope of the AIFMD) and their
compliant alternative investment
funds (including all types of legal
structure, strategy, liquidity and do-
micile). Ireland, and in particular the
Qualifying Investor Fund (QIF), is
AIFMD ready, with the QIF already
meeting many of the requirements
of the AIFMD. erefore, exist-
ing QIFs are expected to make the
transition to AIFMD, including the
benets of the pan-European pass-
port, with minimum disruption and
amendment.
A BRIEF DESCRIPTION OF QIFS
QIFs are the most exible of Irish fund structures, with
few investment limits and no borrowing limits, but with
minimum subscription requirements and appropriate ex-
pertise/understanding criteria. QIFs provide a high level
of structuring exibility, as well as a fast track authorisa-
tion process. Similar to Cayman funds, QIFs have tradi-
tionally been sold on a private placement basis, oered in
accordance with the relevant target jurisdictions’ local pri-
vate placement rules. Although this practice will continue
outside of the European Union, on implementation of the
AIFMD, QIFs will benet from passporting provisions
within the European Union.

QIFs are subject to a minimum subscription require-
ment of €100,000 per investor and investors must meet
certain appropriate expertise/understanding tests. An ex-
emption from these requirements is available to the QIF’s
managers and other persons that are closely connected
with the management of the QIF.
FAST TRACK AUTHORISATION FOR QIFS
e Central Bank of Ireland (Central Bank) does not
require prior ling or review of fund documentation for
QIFs. Instead, there is a self certication regime (certi-
cation has to be given by the QIF and by the Irish legal
advisers). With certication, the fund documentation is
simply negotiated between the promoter, the legal advis-
ers and the other service providers and then executed and
led with the Central Bank. Provided that the documenta-
tion is led by 3pm on the day prior to the date for which
authorisation is sought, the QIF will be authorised on the
requested date without a prior review. A ‘spot check’ post
authorisation review may then take place.
QIF LIQUIDITY AND INVEST-
MENT RESTRICTIONS
QIFs can be structured as open-
ended, open-ended with limited li-
quidity, limited liquidity or closed-
ended schemes. Gates, deferred
redemptions, holdbacks, in-kind
redemptions and side pockets can
all be facilitated within these types
of funds.
QIFs are subject to very few in-

vestment restrictions in respect of
direct investments as follows:
(a) When transacting over-the-
counter in circumstances where
collateral is being passed by the QIF outside the Irish
trustee/custodian’s custodial network, QIFs are gener-
ally required to deal with counterparties with a minimum
credit rating of A2/P2 (or A1/P1 where the QIF’s expo-
sure to such a counterparty may exceed 40% of its net asset
value).
(b) QIFs structured as investment companies must
comply with the principle of ‘spreading investment risk’.
It is le to the discretion of the board of directors to de-
termine actual diversication with reference to particular
strategies.
(c) QIFs may invest up to 100% of assets in underlying
regulated or unregulated funds but no more than 50% of
net assets in a single underlying fund. Investment in an un-
derlying fund in excess of 50% of net assets will be treated
as a feeder type investment.
QIFS ARE THE MOST
FLEXIBLE OF IRISH FUND
STRUCTURES, WITH FEW
INVESTMENT LIMITS AND
NO BORROWING LIMITS
”

HOW TO START A HEDGE FUND IN THE EU 2012
Derbhil O’Riordan
joined Dillon Eustace

in 2003 and became a
partner in 2010. She advises
primarily in the area of
investment funds and
has particular expertise in
exchange traded funds,
hedge funds, sophisticated
Ucits and has also advised
in relation to the listing rules
of the Irish Stock Exchange.
DERBHIL O’RIORDAN OF DILLON EUSTACE EXPLAINS IRELAND’S BENEFITS AS A REGULATED JURISDICTION FOR ALTERNATIVE FUND INVESTORS
AND FUND MANAGERS
QUALIFYING INVESTOR FUNDS –
THE REGULATED ALTERNATIVE
22 HFMWEEK.COM
HOW TO START A HEDGE FUND IN THE EU 2012
(d) Irish Funds may not grant loans, though there are so
many exceptions to this rule as to make the rule virtually
redundant. For example, a QIF may acquire a loan, may
acquire a debt security (including a promissory note or
other securitised loan), may make deposits, may enter any
kind of derivative or may enter into reverse repo agree-
ments.
(e) Borrowing and leverage are not subject to a regula-
tory limit.
QIFS FOR MULTI-JURISDICTIONAL DISTRIBUTION
For fund managers seeking a global marketing solution,
particularly involving US investors, one way of structuring
the QIF for optimum distribution is to use a single Irish
‘master’ fund as a hub and then one or more ‘feeder’ funds

as this can optimise the tax treatment, which, for example,
US tax-paying and US tax exempt investors obtain from
an investment in the structure while at the same time
sheltering non-US investors from US tax risks and report-
ing requirements. With the dual aims of (i) providing US
taxable investors on the one hand and US tax exempt and
non-US investors on the other, with an optimal fund struc-
ture, and (ii) creating a structure that is as cost and op-
erationally ecient as possible, a hedge fund that is to be
simultaneously oered inside and outside the US is gener-
ally structured as a master-feeder.
THIS STRUCTURE MAY TAKE THE FOLLOWING FORM:
• An Irish single or umbrella unit trust (the Irish Mas-
ter Fund) authorised by the Central Bank as a regu-
lated hedge fund. While other types of Irish fund can
also be used, an Irish unit trust can elect to “check the
box” (US Form 8832) to be treated as a partnership
for US tax reporting purposes.
• An Irish single feeder fund investment company or
unit trust (the Irish Feeder Fund) authorised by the
Central Bank as a regulated feeder fund. is vehi-
cle is typically used to separate the US tax exempt
and other non-US (global investors) from US tax-
LEGAL
able investors at the Irish Master
Fund level.
• A Delaware, Cayman
or other oshore feeder fund
typically structured as a limited
partnership or limited liability

company (the Non Irish Feeder
Fund). e Non-Irish Feeder
Fund will be targeted at US tax-
able investors and is oen op-
tional. From a tax and regulatory
perspective, US taxable investors
could invest directly in the Irish
Master Fund instead of investing
indirectly through their invest-
ments in the Non-Irish Feeder
Fund.
• e Irish Master Fund
invests directly in the underlying
assets availing of Ireland’s exempt
domestic taxation regime for pay-
ments or transfers to the Irish and
Non-Irish Feeders. e sole in-
vestors in the Irish Master Fund
will be the feeders and they may invest directly in a
single pool at the Irish Master Fund level or in seg-
regated sub-trusts, if the master is established as an
umbrella fund. e Irish Master Fund can also oer
multiple unit/share classes or series to the feeders.
• e Irish Feeder Fund and Non-Irish Feeder Fund
acquire units/shares in the Irish Master Fund, which
uctuate in value in accordance with the perfor-
mance of the assets at the Irish Master Fund level.
e liquidity at the level of the feeder funds and the
Irish Master Fund level can be matched.
TAXATION

QIFs are not subject to any taxes on their income (prots)
or gains. No stamp duty or capital duty is payable on the
issue, transfer, repurchase or redemption of units/shares
in an Irish Fund. ere are no Irish withholding taxes in
respect of a distribution of payments by an Irish Fund to
investors or in relation to any encashment, redemption,
cancellation or transfer of units/shares in respect of inves-
tors who are neither Irish resident nor ordinarily resident
in Ireland.
CONCLUSION
Ireland’s reputation as the premier domicile in Europe
for the establishment of regulated alternative investment
vehicles has long been recognised by fund managers, and
many have taken the opportunity to distribute their prod-
uct through QIFs not only in Europe and Latin America,
but in the Asia Pacic region, the US and elsewhere.
e AIFMD oers increased marketing opportuni-
ties within the European Union, on a passportable basis,
enhancing the aractiveness of the Irish QIF, which is
AIFMD ready, for fund managers. e QIF is a regulated
product in a market seeking exibility, speed to market
and global distribution, and has a proven track record with
transparency and investor protection, providing an answer
to the question of regulation in the alternative space. Q
“Ireland’s reputation as the premier domicile in Europe for the establishment of regulated
alternative investment vehicles has long been recognised by fund managers”
- Establishment of Investment Funds
- UCITS Management Support
- Service Provider Selection

- Provision of Directors
- MLRO Services
- Liquidations
- Investment Manager Start-up
- Operational Oversight
- Due Diligence Preparation
- Fund Re-domiciliation
- Infrastructure Review /
Development
In
d
e
p
en
d
ence
Commitment
p
E
x
p
ertis
e


www.kbassociates.ie
LONDON
Phillip Chapple
42 Brook Street, London
W1K 5DB

United Kingdom
Tel: +44 (0) 203 170 8811

DUBLIN
Mike Kirby
Fleming Court, Fleming’s Place
Mespil Road, Dublin 4
Ireland
Tel: +353 1 668 7684
Fax: +353 1 668 7696

NEW YORK
Jill Paitchel
260 Madison Ave
New York, NY 10016
USA
Tel: +1 646 216 2103