In addition to co-ordinating license processes and assisting with regulatory documentation and compliance, Chetcuti Cauchi also offers comprehensive advisory services in relation to the structuring of funds. Malta is highly flexible in this regard, and offers fund managers with a wide variety of options.
Legal structure for Hedge Funds
The Maltese jurisdiction allows the use of a variety of legal vehicles in the context of hedge funds. In fact, a Maltese hedge fund can be structured using the following legal vehicles:
- Investment company with variable share capital (SICAV)
- Investment company with fixed share capital (INVCO)
- Partnership
- Unit trust
- Common contractual fund
SICAVs and INVCOs are companies and enjoy separate juridical personality, while Unit Trusts, Mutual Funds and Limited Partnerships are non-corporate forms. While the most popular legal form is the SICAV, with the vast majority of Maltese funds being structure using this form, each structure has different characteristics which may make it more suitable to particular investment objectives.
The SICAV
As stated above, the investment company with variable share capital (‘Société d’Investissement à Capital Variable or SICAV’) is by far the most popular structure for Maltese hedge funds. The SICAV closely resembles the Luxembourg structure of the same name, and is a ‘tried and tested’ vehicle for funds. Shares in a SICAV are not assigned a nominal value, and the share capital of the company is always equal to the value for the time being of the issued share capital of the company. Essentially this means that the structure is particularly well suited for ‘open-ended’ schemes. Also of interest is the fact that the Companies Act states that the objective of the SICAV is that of ‘the collective investment of its funds in securities and in other movable and immovable property or in any of them’; when combined with the MFSA’s flexible approach to investment restrictions in the context of Professional Investor Funds, this means that the SICAV is a very flexible vehicle which permits a great variety of investment strategies.
The INVCOs
The INVCO is an investment company with fixed share capital. The Companies Act states that the INVCO is a public company the business of which is that of ‘investing in funds mainly in securities with the aim of spreading investment risk and giving members of the company the benefit of the results of the management of its funds’. The INVCO is also subject to the following restrictions:
- the INVCO’s holdings in other companies not being investment companies with fixed share capital, does not exceed 15% by value of its investments;
- distribution of the INVCO’s capital profits is prohibited by its memorandum and articles of association; and
- the INVCO does not retain more than 15% of income derived from securities.
Differences between SICAVs and INVCOs
The principal difference between a SICAV and an INVCO is that a SICAV’s share capital is variable, whereas the share capital of an INVCO is fixed. Moreover, A SICAV has a duty to repurchase (i.e. redeem) any of its shares upon a request being made by a shareholder, and this duty of the SICAV has to be specified in its Memorandum and Articles of Association. Finally, as detailed above, the SICAV enjoys considerably higher levels of flexibility when it comes to the investment strategies which it can follow.
‘’Umbrella’’ Companies
Both INVCOS as well as SICAVs may be structured as ‘umbrella’ companies i.e. a structure which includes sub-funds; the assets and liabilities of each sub-fund can be structured as a patrimony separate from the assets and liabilities of each other sub-fund of the company. By employing this structure, the shareholders in each individual sub-fund will benefit from varying returns depending upon the performance of each particular sub-fund i.e. there is no contamination between the assets and liabilities of different sub-funds.
Moreover in case of an umbrella fund comprising sub-funds each of which is set up as a PIF, the relevant minimum investment threshold may be applicable on a per scheme rather than on a per sub-fund basis. Effectively this means that, in, for example, a PIF set up as an Umbrella fund targeted to Qualifying investors, an investor may hold less than the minimum of EUR 75,000 in a particular sub-fund, if his total holding in the whole scheme is at least EUR 75,000.
Multi-class companies, i.e. SICAVs and INVCOs which have multiple classes of shares, each having different characteristics but not separate patrimony, are also permitted. ‘Umbrella’ and ‘Multi-class’ notions can be combined to create highly flexible structures which permit a very wide variety of strategies and business models to be followed by one entity e.g. a fund can have one sub-fund which follows a high risk strategy, which sub-fund has two classes having different fee structures, and another sub-fund following a low risk strategies, with various classes each the NAV of which is calculated with different frequencies. The flexibility afforded is such that different sub-funds could have different managers following very different strategies.
Establishment of additional sub-funds
A licensed PIF constituted in the form of an Umbrella Fund wishing to establish additional sub-funds can do so by fulfilling a number of notification requirements, such as the submission of a final draft of the revised Offering Document/ Marketing Document (as applicable).
Fund of Funds and Master-Feeder structures
Both Fund of Funds structures as well as Master-Feeder structures have been established and operated effectively in Malta.
Unit Trusts, Mutual Funds and Limited Partnerships
Although not as common as investment companies, these legal forms may prove to be suitable for particular investment objectives.
Unit Trusts
A unit trust is a trust established for the purpose of providing, for persons having funds available for investment, facilities for the participation by them as beneficiaries under the trust, in any profits or income arising from the acquisition, holding, management or disposal of any type of property. Unit trusts are created by means of a written instrument.
The two central figures in the Unit Trust are the Manager and the Trustee. The trustee and the Manager must be two separate and independent persons, and each has distinct duties. The trust manager runs the trust for profit, whilst the trustees ensure that the fund manager adheres to the investment objectives of the trust and safeguards the assets of the trust. The trustee is bound to carry out the instructions of the Manager, unless such instructions are in conflict with the conditions of the Trust Deed or the license.
Property which is settled on a trust constitutes a separate fund owned by the trustee, distinct and separate from the personal property of the trustee and from other property held by the trustee under any other trust.
While the Unit Trust is still a long way from enjoying the popularity of the SICAV in Malta, it is nonetheless a useful and flexible instrument. In particular, unit trusts can be rendered tax transparent under Maltese tax law, which may be very beneficial in certain situations, such as when the assets in question attract high withholding taxes in the country of issue.
Mutual Funds
Mutual funds are contractual arrangements which do not possess legal personality and are regulated by the general contract law of the local Civil Code. Since the Mutual Fund has no separate legal personality a Custodian in whose name the assets are to be held is required.
Limited Partnerships
Limited Partnerships, or partnerships en commandite, may be used as a tax transparent collective investment vehicle which is easily recognizable by the international funds industry. Limited partnerships do not possess legal personality, and are created by a partnership deed.
