How to Start a Hedge Fund in Luxembourg
Updated on Monday 25th September 2023
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Luxembourg is the world's top hub for the distribution of cross-border funds, and it is also the largest investment fund center in Europe. The Luxembourg hedge fund industry has expanded quickly, and the Grand Duchy is a well-known center of excellence. Foreign investors interested in starting a hedge fund in Luxembourg should know that the first investment vehicle was incorporated in this country, which, at the moment, provides the most attractive investment legislation for the domiciliation of investment funds.
The article below explains the main steps of creating a hedge fund in Luxembourg.
| Quick Facts | |
|---|---|
| Applicable legislation | - UCI (undertakings for collective investment) Law, - SIF (specialized investment funds) Law. |
Available registration forms | - investment companies with variable capital (SICAV), - investment companies with fixed capital (SICAF), - common investment fund. |
Types of fund structures | - SIF, - UCIS, - UCITS, - SOPARFI. |
| Features of the SIF | - can be used to invest in any type of assets, - advantageous taxation system, - possibility to have an active management portfolio. |
| Characteristics of the UCIS | - must be administered by a specialized management company, - large investment portfolio, - possibility to be created as a common fund. |
| Features of UCITS funds | - possibility to invest in liquid assets, - can operate at EU level, - available to retail investors. |
| Characteristics of a SOPARFI company | - the fund can be created as financial holding company, - it is subject to the Luxembourg corporate tax, - investors can engage in commercial undertakings. |
| Types of investors addressed | Experienced and unprofessional, depending on the form of the fund |
| Types of assets hedge funds can invest in | - financial assets, - real estate, - pension administration, etc. |
| Registration steps | - document drafting, - investment company registration, - licensing. |
| Registration time frame (approx.) | A Luxembourg hedge fund can be set up in approx. 2 months at the earliest. |
| Licensing authority | The Luxembourg Financial Market Regulator (CSSF) |
| Licensing exemptions (if available) | Yes, for hedge funds with less than 15 investors |
| Management requirements | Authorized investment managers |
| Taxation of hedge funds | Depending on the chosen structure, a hedge fund can be imposed a subscription tax or other levies. |
Steps to create a hedge fund in Luxembourg
One of the best ways to set up a hedge fund in Luxembourg is through Specialized Investment Funds or SIFs. The main steps for its registration consist in:
- drafting the memorandum and articles of association, which will be used to establish the company and comply with the offering documentation;
- creating the offering memorandum, which outlines the terms of the offering of the fund's shares;
- the third stage is registering the fund with the CSSF and the limited liability company with the Registrar of Companies.
One of the best offshore jurisdictions to create such a fund is the Cayman Islands. There, the Cayman SPC, or segregated portfolio company is the most suited entity for this purpose.
What is a hedge fund in Luxembourg?
A hedge fund in Luxembourg is a type of alternative investment fund in which the investors pool their financial capital with the purpose of conducting different investment strategies that will guarantee the highest return on investment. The procedure on how to start a fund in Luxembourg registered as a hedge vehicle stipulates that the investors will need to choose a legal entity to represent the respective structure.
In Luxembourg, hedge funds can be set up as one of the following:
• public limited company;
• private limited company;
• limited partnership.
Investment funds can be established everywhere in the world. The Cayman Islands, a recognized jurisdiction, also falls under this category. The Cayman SPC is available there for a variety of uses. You can rely on our agents for information if you decide to use this kind of business as an investment fund.
Characteristics of hedge funds in Luxembourg
Numerous aspects need to be considered when setting up a hedge fund in Luxembourg, including whether the country is a business-friendly one if it has a stable government and well-developed financial services laws, and a well-organized law system. Just as important is the tax code that exempts businesses from paying any income or withholding tax. This is why many fund managers have chosen Luxembourg, Cayman, or the BVI as their home because of all these factors.
Hedge funds can be created through Specialized Investment Funds in Luxembourg.
Hedging is the method through which fund investors hold both long and short positions to ensure they make a profit despite the market.
Hedge funds imply that the fund management uses a combination of complicated investment strategies and leverage to make higher returns. They are available with different types of structures and with various assets and securities. By comparison, stock funds or property funds invest in listed equities or real estate, respectively, as indicated by their names.
When starting a hedge fund in Luxembourg, the investors will benefit from the following characteristics for increasing the value of their business:
• carrying multiple investment strategies;
• a flexible manner for developing the respective investment strategies;
• using a management team to manage the financial assets of the hedge fund.
Hedge funds registered in Luxembourg can be set up following the regulations of the Commission de Surveillance du Secteur Financier (CSSF), the main supervisory institution for investment vehicles in this country.
Another advantage related to the hedge funds startups in Luxembourg refers to the wide range of investment regimes under which such vehicles can be set up.
Hedge funds can be set up as undertakings for collective investments (UCI), under the regulations of Part II of the 2010 law. In 2007, the local authorities enacted the specialized investment funds (SIF), addressed to institutional and qualified investors.
More recently, the local authorities also created the reserved alternative investment fund (RAIF) structure, which does not require obtaining authorization from the CSSF.
Hedge fund management in Luxembourg
Starting with 2018, Luxembourg investment fund managers must obtain authorization for the activities they will undertake, which has led to increased confidence of those seeking to set up hedge funds here. The law provides for:
- authorized Alternative Investment Fund Managers (AIFMs);
- management businesses;
- self-managed investment companies;
- Luxembourg-based branches;
- UCITS management companies;
- internally-managed Alternative Investment Funds (AIFs).
Each Luxembourg hedge fund must have a single AIFM, who is in charge of ensuring compliance with the AIFM Law's requirements, with the exception of some restricted exemptions outlined by the same act. When allowed by the legal structure employed, such funds can choose to be managed internally or by an external AIFM.
It is also possible to establish an external AIFM in Luxembourg, another EU Member State, or a non-EU nation to manage the hedge fund.
The hedge fund’s managing or governing bodies must have a minimum of 3 members.
If you want to establish a hedge fund in Luxembourg, we have affiliates who can help you.
How to set up an investment company using a hedge fund in Luxembourg
The Memorandum and Articles of Association, which will be used to establish the company and comply with the offering documentation, must be prepared by the promoter as the first stage. The offering document, which outlines the terms of the offering of the fund's shares, is created in the second phase.
The third stage is registering the fund with the CSSF and the exempt limited liability company with the Registrar of Companies.
In accordance with Section 4(3) of the Mutual Funds Law (2009 Revision), most of the funds are registered with the CSSF.
There are also exemptions from this rule. For example, some hedge funds might not need to be registered if they have 15 or fewer investors.
As mentioned above, the Caymans is another great location for setting up a hedge fund, the preferred entity in that case being the SPC.
UCITS hedge funds in the Grand Duchy
Alternative UCITS funds have grown in popularity among investors in recent years because they provide a distinctive blend of returns akin to those of hedge funds in a liquid and regulated form.
In terms of newly established funds, Luxembourg is the leading fund center in Europe for liquid alternatives.
Alternative UCITS have outperformed non-UCITS hedge funds in recent years in terms of growth.
Other legal forms through which it is possible to create hedge funds in the Grand Duchy
One of the best ways to open a hedge fund in Luxembourg is the Specialized Investment Funds (SIF). Its main features are:
- it only addresses qualified investors;
- it can be established as an umbrella fund overseen by the CSSF.;
- its portfolio is not very diverse.
SIFs may also choose the EU Passport if they meet specific requirements.
Another option is the Investment Company in Risk Capital, or SICAR. This type of fund will be subject to the supervision of the CSSF. Also:
- a SICAR can meet the requirements for the AIFMD passport;
- it is exempt from any laws governing diversification;
- it is open to qualified investors;
- it has access to double-taxation agreements.
The Reserved Alternative Investment Fund, or RAIF was introduced in 2016 and was very appreciated by investors.
Using these entities for the creation of a hedge fund in Luxembourg leads to a quick setup procedure and can be converted into an SIF or SICAR.
An RAIF is required to name an AIFM, who is then subject to CSSF regulation. As a result, the RAIF can use the AIFMD passport and promote itself across the European Union.
Why open a hedge fund in Luxembourg
The Luxembourg hedge fund industry has rapidly expanded, making Luxembourg a recognized top domicile for hedge funds. Moreover, leading global hedge fund managers have chosen Luxembourg as their domicile for their funds. The Grand Duchy presently serves as the domicile for half of all hedge funds operating in Europe, with the remaining funds being split between Ireland and a few other countries.
Investment funds with a Luxembourg domicile profit from established, secure, and effective connections between local administrators and the local and international Central Securities Depository. The Luxembourg Stock Exchange is a popular primary listing venue for cross-listings due to its simple and effective listing process.
In numbers, the Luxembourg investment fund market differentiates itself through:
- the fact that at the end of 2019, the Luxembourg hedge fund industry represented 18.9% of the worldwide market share;
- at the middle of 2021, the net assets under management in Luxembourg exceeded EUR 5,332 billion;
- investment funds created in Luxembourg are marketed in more than 70 countries.
We also have a video on this subject:
How long does it take to open a Luxembourg hedge fund?
The procedure of creating a Luxembourg hedge fund depends on whether it is supervised or unsupervised by the CSSF. A supervised structure can take up to 2 months to set up, depending on the complexity of the structure and how long it takes to receive regulatory approval from the CSSF. A non-supervised fund can be established in as little as 2 weeks.
Businessmen are invited to contact our team of affiliates in Luxembourg for more details on the hedge fund structures available here.