Luxembourg Complex alternative UCITS & Specialised Investment Funds pot

Bahrain • British Virgin Islands • Cayman Islands • Dublin • Guernsey
Hong Kong • Jersey • London • Luxembourg • Shanghai • Tokyo
www.ogier.com
Luxembourg
Complex alternative UCITS &
Specialised Investment Funds
Asset class - Hedge
Investment Funds | June 2012
Introduction
A founder member of the European Union
beneting fully from free movement of capital
and freedom of establishment within the EU,
Luxembourg is also one of the largest global
nancial centres, beneting from exible and
attractive legal, regulatory and tax regimes and a
signicant concentration of professional service
providers to the nancial services industry.
Luxembourg ranks as the largest EU fund
domicile jurisdiction and the second largest fund
domicile jurisdiction globally. After more than
30 years of development, total net assets under
management of Luxembourg undertakings for
collective investment and specialised investment
funds stood at €2.157 trillion as at January 2012.
These assets under management are held in
2,450 undertakings for collective investment,
including UCITS, introduced in 1988, and
approximately 1,400 specialised investment
funds, introduced in 2007.
Approximately 75% of internationally distributed
UCITS are domiciled in Luxembourg.

Luxembourg’s solid track record of stability
has enabled it to meet the challenges arising in
global markets since 2008 with a Triple A credit
rating, low levels of sovereign debt and one
of the highest per capita GDP globally. This
economic and political stability, allied to the legal,
regulatory and scal attributes of its investment
funds industry has resulted in Luxembourg’s
position as a premier-ranking fund domicile.
Domicile
diversification
Over the last 5 years, Luxembourg regulated
fund products have been increasingly used
by managers pursuing complex, alternative
strategies in a complementary fashion to
structures in traditional hedge fund domiciles.
This has enabled managers to respond to
regulatory change and an increasingly broad
range of investor preferences with diversication
in both product ranges and distribution networks.
Complex UCITS in particular have played a key
role in this.
Principal
Luxembourg hedge
fund vehicles
There are two principal, regulated Luxembourg
fund vehicles which may be used for complex,
alternative strategies, as follows:
1. undertakings for collective investment in
transferable securities (UCITS) and

2. specialised investment funds (SIF).
Both UCITS and SIF are regulatory
classications. They describe regulated fund
products which can be structured in various
legal forms, with tax efcient outcomes following
from such selection. A summary of the vehicles
commonly used as complex UCITS and SIF for
hedge-type strategies and the corresponding tax
treatment is set out below.
As regulated products, both UCITS and SIF are
subject to the prior authorisation and ongoing
supervision of the Commission de Surveillance
du Secteur Financier (CSSF), the Luxembourg
regulatory authority. In discharge of its duties,
the CSSF is charged with maintaining investor
protection and the stability of Luxembourg’s
nancial services industry.
In addition to complex UCITS and SIF, complex
alternative funds pursuing an equities-only
strategy and with the aim of inuencing the
management of portfolio companies may be
structured as “investment vehicles in risk capital”
(SICAR). In relation to SICAR, please refer to
our separate brieng “Luxembourg Alternative
Investment Funds”, which may be accessed via
the Luxembourg section of www.ogier.com.
Investment Funds | June 2012
2
Choice of fund
vehicle

The regulatory frameworks for both UCITS and
SIF result in identical basic fund structures (as
shown below). As tax outcomes are also broadly
similar, selection of regulatory product will be
driven by a balancing of the following factors:
• distribution;
• investment policy & portfolio composition;
• leverage policy;
• risk-spreading and;
• preferred level of regulation.
Example structure

Between complex UCITS and SIF (and similarly
SICAR), the fundamental balance lies between
greater distribution benets for UCITS but less
prescription as to investment policy, portfolio
composition, leverage, risk-spreading and
operational matters for SIF.
A summary of these factors is set out in
“Luxembourg Hedge Funds - Executive
Summary” in the Luxembourg section of
www.ogier.com. A fuller description appears in
this brieng below.

3
Investment Funds | June 2012
Notes:
1. Investment advisory role most common in practice but varies with client structuring requirements.
2. Luxembourg situate and regulated (or approved for auditors).
3. ManCos are only required for FCP Funds (both UCITS and SIF).

4. Please see separate client brieng, “Luxembourg Unregulated Investment Vehicles” in the
Luxembourg section of www.ogier.com.
Fund: UCITS / SIF
• Co-owned asset pool (FCP); or
• Open-ended investment company
(SICAV)
Investment
Manager/Advisor
1
2
Management
Company
Custodian
Auditor
Fund
administrator,
transfer and
registrar agent
4
2
2
2
2; 3
Holding Companies
UCITS Investments
• Restricted asset classes
• Detailed diversification
requirements
• Borrowing prohibition
(but leverage effect possible

through derivatives).
SIF:
• Eligible investors only:
Institutional, professional,
sophisticated
• Private placement
currently (unless listed)
• EU AIFMD
passport anticipated
UCITS:
• No investor eligibility
restrictions
• EU passport distribution
• International recognition
SIF Investments
• All asset classes
• Broad diversification
requirements
• No borrowing / leverage
restrictions
4
Investment Funds | June 2012
4
Distribution
Originally set up to implement EU single market
principles in nancial services, UCITS may be
distributed to all categories of investors within
the EU, without regulatory restriction as to
investor eligibility.
With the introduction of UCITS IV in Luxembourg

in 2011, the process in practice of such
distribution to EU investors has been signicantly
stream-lined with the effective time-to-market
from the decision to distribution reduced from 2
months to 10 working days.
The process commences with submission of a
notication pack to CSSF including the following:
• key investor information document (KIID) (in
the language of the investors’ jurisdiction);
• prospectus, constitutional documents,
nancial reports and original CSSF UCITS
regulatory authorisation; and
• information on target jurisdictions’
applicable marketing rules.
All documents other than the KIID may be in
English.
CSSF veries that the notication pack is
complete, transmits details to its equivalent
regulators in the recipient investors’ jurisdictions
within 10 working days and informs the
manager. On receipt of that notication, the
manager may start distribution to potential
investors in those jurisdictions. Regulators in
the host jurisdictions will then review within 5
working days. The manager is responsible for
identifying and complying with any applicable
local requirements. In practice this is addressed
through use of established distributors, although
legal responsibility for compliance remains with
the manager.

Although UCITS may lawfully be offered to all
categories of EU investors, managers may apply
fund-specic eligibility criteria in the prospectus
if appropriate. For example, funds may be
offered only to institutional investors and / or an
appropriate minimum investment threshold may
be set, for example $50,000 / 100,000/ 1 million,
provided such criteria are objective.
In addition to geographic distribution advantages
within the EU, UCITS also benet from
advantageous treatment in institutional investors’
asset allocation rules. UCITS are also extensively
used for distribution to investors in many non-EU
markets due to the perceived advantage of their
bench-marked brand recognition.
UCITS fall outside the scope of AIFMD and the
balance of factors which makes them attractive
to managers of complex alternative funds is
therefore unaffected by it.
In contrast, SIF are available only to eligible
investors comprising: institutional; professional;
self-certifying sophisticated private investors with
a minimum investment of €125,000; investors
certied as sophisticated by a regulated
intermediary (no minimum investment required);
and carried interest investors acting in the
management of the SIF.
Distribution of unlisted SIF outside of
Luxembourg is currently determined by national
private placement regimes. SIF will become

subject to an AIFMD overlay as AIFMD is
implemented, and are anticipated to be an early
beneciary of EU AIFMD passporting, following
the UCITS model.
Bench-marked brand recognition for
Luxembourg SIF in non-EU markets is
developing but is at an earlier stage of
development than for UCITS.
Neither UCITS nor SIF carry any minimum or
maximum requirements as to investor numbers,
and may be constituted as single-investor or
dedicated funds.
Investment
policy & portfolio
composition
SIF have greater exibility in regulatory
requirements as to investment policy and
portfolio composition. On condition of adequate
disclosure in offer documents, there are no
restrictions on asset class, investment policy
or permitted investment-holding instruments
applicable to SIF.
5
Investment Funds | June 2012
In contrast, UCITS portfolio composition is
more restricted in scope, being limited to:
transferable securities; derivatives based on
eligible underlying assets (including currencies,
commodities and interest rates); bonds and
money market instruments; cash at bank; certain

eligible structured nance products; and other
collective investment undertakings.
Transferable securities are (broadly) negotiable
securities listed on a regulated, liquid market
with regular, accurate price information which are
compatible with the UCITS’ investment policy
and risk management framework.
Derivatives (referencing eligible underlying
investments) must be either listed on a regulated
market or be over-the-counter products issued
by eligible counterparties with reliable fair-value
valuation. Please note, this is a summary only of
a technical area.
Leverage policy
SIF are not subject to regulatory limitations on
leverage policy.
In contrast, UCITS are substantially prohibited
from entering into borrowing. However, UCITS
may enter into securities lending, sale and
repurchase transactions relating to transferable
securities or money market instruments, in each
case for the purpose of risk spreading, cost-
mitigation or for additional income or capital
generation, in accordance with the fund’s overall
risk prole. Detailed rules apply in relation to
counterparty risk, concentration risk, eligible
collateral and valuation.
Managers of Luxembourg UCITS have in
practice lawfully applied such techniques and
appropriate derivatives strategies to deliver the

value multiplier effects of leverage without being
hindered by the prohibition on borrowing and yet
respecting borrowing constraints.
Risk-spreading
SIF are subject to a broad portfolio risk-
spreading requirement. Although not specied in
the SIF Law, CSSF policy requires that SIF
apply investment restrictions so that no single
investment represents more than 30% of the
SIF’s total net assets.
For SIF, this applies also to short selling in that
it cannot result in the SIF holding uncovered
securities of the same type issued by the same
issuer representing more than 30% of the SIF
total net assets. This general position is subject
to any other temporary restrictions on short
selling in force from time to time. When entering
into derivative instruments, SIF must ensure
comparable risk-spreading through appropriate
diversication of the underlying assets.
Exemptions apply in relation to (a) securities
issued or guaranteed by an OECD Member
State (or by its local authorities) or by certain
supranational bodies and/or (b) investments in
portfolio funds which are themselves subject to
risk-spreading requirements at least comparable
to those of SIFs. Other exemptions to the risk-
spreading requirements may be available on a
case-by-case basis.
UCITS are subject to more detailed risk-

spreading / portfolio diversication requirements
than the broad 30% rule applicable SIFs.
Notwithstanding this, managers have found
such requirements to be consistent with their
strategies in practice and for UCITS’ distribution
advantages to outweigh compliance with these
regulatory requirements.
Physical short-selling is not permitted by
UCITS. However, synthetic strategies utilising
derivative investments of similar effect may
lawfully be applied, subject to any other
temporary restrictions on short-selling of general
application in force from time to time.
Preferred level of
regulation
In summary, the distribution advantages of
UCITS do bring an enhanced level of regulation.
In contrast, SIF enjoy a less prescriptive
regulatory environment but without the full
investor distribution benets of UCITS.
The optimum outcome will be determined in
each individual case on an assessment of the
balance of these factors.
Investment Funds | June 2012
6
Fund vehicles
Complex UCITS and SIF pursuing hedge
strategies are principally set up as either:
1. tax transparent, co-owned asset pools,
managed by a separate management

company (fonds commum de placement)
(FCP) or;
2. open-ended, variable capital investment
vehicles (SICAV).
An FCP is an undivided pool of assets, co-
owned by investors directly. FCP have no
separate legal personality and are managed by a
separate, regulated management company. This
management company acts in the name and on
behalf of the FCP, in the interests of unit-holders.
The FCP is similar to the English law unit trust
and US mutual fund.
Unit-holders have limited liability, restricted to
their agreed level of contribution. Their minimum
legal rights are generally more limited than those
of shareholders. Subject to any case-specic
provisions in an FCP’s management regulations
(similar in function to constitutional documents),
unit-holder rights will commonly be limited to
approval of annual accounts and to changes to
the offer document or management regulations.
When used for hedge-type strategies, FCP will
be constituted on an open-ended basis.
An FCP is deemed to be a Luxembourg fund if its
management company has its statutory seat in
Luxembourg.
SICAV are open-ended, variable capital
investment vehicles. They are generally
constituted as public limited companies (sociétés
anonymes). Having a variable capital means their

issued share capital is always, automatically
equal to their net asset value, without formality,
vote or amendment. Although other fund vehicles
are legally possible for both UCITS and SIF,
such vehicles are not commonly used to pursue
hedge-type strategies.

Both UCITS and SIF may be constituted as
either single asset-pool funds or with multiple,
segregated compartments. Such compartments
provide ring-fenced asset (and liability) pools and
are the mechanism of choice for umbrella multi-
strategy and/or multi-currency funds. There are
no restrictions as to currency selection.
Both UCITS and SIF have a general market
capitalisation requirement of €1,250,000, with the
following additional requirements: this general
minimum capital must be subscribed for within
6 months of CSSF authorisation for UCITS, with
€300,000 being paid up as at authorisation for
UCITS structured as self-managed SICAV; for SIF
this general market capitalisation requirement
must be subscribed within 12 months of CSSF
authorisation and be 5% fully paid up.
Provided this minimum capitalisation requirement
continues to be met, there are no restrictions
regarding dividends or distributions for either
UCITS or SIF, whether structured as FCP or
as SICAV (save any that may be applied in the
constitutional documents on a fund-specic

basis).
Both UCITS and SIF assets are valued at
fair value, determined in accordance with
applicable accounting standards pursuant to the
constitutional documents and conrmed by their
independent auditor.
Detailed additional rules apply for UCITS
as to the valuation of certain assets, the
responsibilities of UCITS management
companies, the frequency of NAV calculation
(which must be at least twice monthly),
independent third party verication of NAV
calculation and risk management review.
Required
Luxembourg
service-providers
Both UCITS and SIF which are structured as
FCP must appoint a regulated Luxembourg
Management Company (ManCo). If structured
as SICAV, a ManCo may be appointed (but is
not obligatory). If a ManCo is not appointed,
the SICAV (whether UCITS or SIF) will be self-
managed. If so, the SICAV must also comply with
ManCo regulatory requirements.
7
Investment Funds | June 2012
All UCITS and SIF must appoint Luxembourg
regulated central fund administration, registrar
and transfer agent service providers and CSSF
approved auditors.

SIF must appoint a Luxembourg regulated
custodian approved by the CSSF, whose
responsibilities are to verify title to portfolio
assets at acquisition and to provide periodic
monitoring of the continuing ownership of the
portfolio by the SIF and the related portfolio
funds-ows. This does not necessarily extend to
safe-keeping of title documents.
For UCITS, this portfolio and fund-ow
supervisory monitoring is carried out by the
UCITS’ depositary which must therefore also
apply such monitoring oversight to dealing
by the UCITS’ prime broker. The depositary’s
appointment must be approved by CSSF.
Depositaries must be Luxembourg regulated
credit institutions or branches of EU regulated
banks.
Offer documents
UCITS offer documents must contain prescribed
information as to the fund and its service
providers. UCITS must also use a pro-forma
key investor information document providing an
abridged summary for investors.
In contrast, there are no prescribed content
requirements for SIF offer documents other than
the general requirement to include all information
necessary for investors to make informed
judgements of the investment proposition and of
the risks attaching to it. The key elements of offer
documents must be updated (as required) prior

to any future closings involving new investors.
In practice, where managers utilise
complementary fund vehicles in other
jurisdictions, UCITS and SIF offer documents
may be issued to investors in substantially
similar (and familiar) formats, with only limited
adjustment often being required to meet local
regulatory requirements.
Reporting
UCITS must provide detailed audited annual
reports and unaudited semi-annual reports to
investors and CSSF, nancial information is also
submitted monthly to CSSF.
For SIF the minimum required investor reporting
takes the form of the annual report, there is no
obligation to publish semi-annual reports, to
submit monthly nancial information to CSSF
or to prepare consolidated nancial statements,
although more frequent investor liaison may be
adopted if considered appropriate.
Stock exchange
listing
Both UCITS and SIF units may be stock
exchange listed on meeting the applicable
exchange admission and ongoing requirements.
Ensuring compatibility between free
transferability requirements of the relevant
exchange and applicable eligible investor
requirements is required.
Such listing may assist distribution either in

relation to: non-EU investors; institutional asset
allocation requirements; or, for SIF prior to
AIFMD overlay, to utilise the EU Prospectus
Directive passport for cross-border distribution
(implemented in Luxembourg in 2005).
Regulatory
application
Commensurate with the sophisticated nature
of SIF investors, the regulatory approach to
authorisation and ongoing supervision is less
extensive than that applicable to UCITS.
The application will include regulatory approval
of the offer document and constitutional
documents. For both UCITS and SIF, directors
(and ManCo director and shareholders) must
also be approved as being of good standing
Investment Funds | June 2012
8
with appropriate experience, as must the
selection of Luxembourg regulated custodian,
fund administrator, transfer and registrar agent
and auditor. CSSF may also request any other
information or documents considered relevant
from time to time.
For UCITS, CSSF also applies a promoter
policy review and approval including nancial
statements. In contrast, for SIF no separate
promoter review / authorisation is applied.
UCITS have detailed compliance responsibilities
in relation to risk management including

as to: organisational separation from
portfolio investment management; valuation
methodologies; and global risk exposure limits.
In line with anticipated AIFMD requirements,
since March 2012 SIF are required to implement
adequate risk management systems and
organisational arrangements to prevent conicts
of interest.
CSSF authorisation for SIF may take three to
six weeks depending on investment policy
and strategy. Complex UCITS authorisation
commonly takes approximately the same time.
On authorisation, UCITS and SIF may then
conduct their rst closing.
Any appointment of new directors, change
of custodian or amendment of constitutional
documents requires CSSF prior approval.
Luxembourg tax
FCP are generally transparent for Luxembourg
tax, SICAV are generally opaque.
UCITS and SIF are both exempt from
Luxembourg direct taxation. UCITS are subject
to an annual subscription tax calculated at
0.05% per annum of the net asset value,
calculated and payable on a quarterly basis,
although this may be reduced to 0.01% (or
exempted) in certain circumstances. SIF are
subject to an equivalent annual subscription tax
of 0.01% There is a negligible applicable
capital duty.

UCITS and SIF both are exempt from
Luxembourg income tax, municipal business
tax and net wealth tax. Distributions / dividends
by UCITS and SIF to investors and payment
of unit redemption monies are not subject to
Luxembourg withholding tax (subject to the EU
Savings Tax Directive).
Both UCITS and SIF (however structured)
effectively qualify as taxable persons for VAT
purposes. Management and administration
services provided to UCITS and SIF are VAT
exempt. Depositary, audit, and professional
advisory services applied to UCITS and SIF are
however subject to VAT.
For efcient structuring, UCITS and SIF may
hold portfolio investments via intermediate
holding companies, depending on the
geographic location of the portfolio. Please refer
to our separate client brieng, “Luxembourg
Unregulated Investment Vehicles” in the
Luxembourg section of www. ogier.com.
Investors’ tax treatment depends on many
individual factors including the place of such
investor’s residency. Investors should seek
specic, independent tax advice.
Author
Daniel Richards
Partner, Luxembourg
Key contacts for
Luxembourg

Funds
Europe, Middle East and Africa
Francois Pfister
Partner, Luxembourg
T +352 2712 2020
E francois.p
Daniel Richards
Partner, Luxembourg
T +352 2712 2011
E
Nick Kershaw
Partner, Jersey
T +44 1534 504235
E
Michael Lombardi
Partner, Jersey
T +44 1534 504280
E
Caroline Chan
Partner, Guernsey
T +44 1481 752215
E
William Simpson
Partner, Guernsey
T +44 1481 737166
E
North and South America
Peter Cockhill
Partner, Cayman Islands
T +1 345 815 1854

E
Giorgio Subiotto
Partner, Cayman Islands
T +1 345 815 1872
E
Asia and Australasia
James Bergstrom
Partner, Hong Kong
T +852 3656 6055
E
Nicholas Plowman
Partner, Hong Kong
T +852 3656 6014
E
Kristy Calvert
Managing Director
+86 21 6157 5190

Skip Hashimoto
Managing Director
+81 3 6430 9500

Russia and CIS
Marc Yates
Partner, Jersey
T +44 1534 504220
E
Ray Wearmouth
Partner, British Virgin Islands
T +1 284 852 7364

E
This brieng provides a summary only of the current law and practice in Luxembourg at the date of writing and is
subject to change therein. It does not purport to be comprehensive and does not constitute legal or tax advice for
reliance purposes. Specic, professional advice should be sought on each occasion.
Image: Philharmonie Luxembourg - Reections, by: Buddhaah
Investment Funds | June 2012
9