Specialised investment funds: offering benefits for qualified investors

So you’ve taken your first steps in the world of investment? Now it’s time to find out a little more about financial instruments that are reserved for qualified investors. Read on to learn about funds, with a particular focus on Luxembourg’s specialised investment funds (SIF).

What is an investment fund?

An investment fund or undertaking for collective investment (UCI) is a financial product containing the money of several investors with identical investment objectives (in terms of asset class, business segment, geographical area, etc.). The money is pooled and then invested in products such as equities, bonds, currencies or commodities. The fund enables individuals to invest on a wider scale and therefore reduce their costs.

Investors can put their money into different types of fund with varying degrees of risk and diversify their investments.

Investors can manage their investment through a bank, a broker, an insurance firm or directly via a fund manager. The fund manager is responsible for administering the fund’s capital, or assets. They buy or sell units in accordance with the UCI’s strategy and characteristics.

There is a wide range of regulated and unregulated investment funds out there, each with their own particular setup in terms of legal form (company, contractual agreement, etc.), investment objective (accumulation or distribution of returns), management methods, obligations, transaction fees, etc.

In order to choose the fund that is best suited to their own objectives and profile, investors must learn more about the nature of the investment by analysing fund documentation (e.g. prospectus, deed of incorporation, key investor information document). This documentation provides information on the fund’s objective, strategy, precise function and performance, as well as an assessment of the risks involved.

Once they have sought out the necessary information, investors can put their money into different types of fund with varying degrees of risk and diversify their investments. Remember, you should avoid putting all your eggs in one basket!

Specialised investment funds

Now that you know a little more about investment funds as a whole, it’s time to concentrate on specialised investment funds (SIFs).

This type of fund was created in Luxembourg by the Law of 13 February 2007 on specialised investment funds (as amended). Unlike traditional UCIs, SIF units are reserved for qualified investors, i.e. institutional and professional investors or private clients who have extensive knowledge of how investment funds work.

Anyone other than institutional or professional investors who wishes to invest in a specialised investment fund must confirm in writing that they have “qualified investor” status and either:

• • invest at least €125,000.00; or
  • provide a certificate, issued by a credit institution, investment firm or asset management company, declaring that they have the investment expertise, experience and knowledge required to invest in an SIF.

The following SIFs are required to name an external alternative investment fund manager (AIFM) or comply with the relevant provisions of the Alternative Investment Fund Managers Directive:

• • those with a net asset value above €100 million and for which investors can redeem their units on request,
  • and those with a net asset value above €500 million for which investors cannot redeem their units on request, and which may not engage in loan-based financing activities.

How does an SIF work?

We should start by stressing that an SIF can be either a collective vehicle for several investors or reserved for a single investor. In the latter case, the sole investor can determine the investment strategy and appoint a management company to take charge of the portfolio and the administration of the SIF.

SIFs also enjoy lighter regulations than traditional UCIs and fiscal advantages.

SIFs can invest in several asset types, including traditional financial products (equities, bonds, cash, etc.), venture capital funds, hedge funds and real estate. Except where an exemption is granted, they cannot invest more than 30% of their funds in assets of the same nature from the same issuer.

SIFs must manage their portfolio actively. This means they can use various analysis tools to develop a strategy aimed at securing the best possible return on their portfolio of assets.

SIFs also enjoy lighter regulations than traditional UCIs (UCITS) and fiscal advantages, as they are not subject to levies or withholding tax on dividends paid. They are liable only for an annual tax of 0.01% of their net asset value on the last day of each quarter.

One example would be a wealthy family setting up an SIF to group together all their assets (property, land, equities, bonds and cash). The units of this fund could then be divided up between the family members in accordance with their rights.

Remember that although SIFs are more flexible than traditional UCIs (UCITS), they are also more complex and risky, which is why their investors need to be qualified in order to invest with full knowledge of the facts.

What are the terms and conditions for setting up an SIF in Luxembourg?

A specialised investment fund may be less restrictive for investors, but it is bound by certain legal obligations.

Among others, a SIF can take the legal form of a Fonds Commun de Placement (mutual fund, or FCP), a Société d’Investissement à Capital Variable  (investment company with variable capital, or SICAV).

SIFs are a more flexible financial instrument for informed investors who are looking for returns.

While it is true that SIFs are more flexible than other funds, they still have to receive authorisation and are subject to supervision by the CSSF, Luxembourg’s financial regulator.

Once this authorisation has been given, unlike other UCIs, SIFs do not have to write a semi-annual report or periodically publish their net asset value (NAV). They need only provide an annual NAV and a report six months after the fund has closed, in addition to the mandatory prospectus.

The minimum capital for these funds is €1,250,000.00, which must be reached within 12 months of CSSF authorisation. SIFs may be divided into sub-funds, each of which is considered a separate part of the fund’s assets.

Lastly, the fund administration and the bank to which the SIF entrusts its assets must be located in Luxembourg.

According to the CSSF, the Grand Duchy is one of the most attractive centres for investment in Europe. There were 3,098 SIFs as at 31 May 2024, containing total net assets of €762.438 billion.