How to Start a Hedge Fund in Switzerland
The main Swiss laws on hedge funds
Until a few years ago, Switzerland was a preferred destination for offshore investment funds, however, when set up as alternative vehicles, hedge funds also become quite appealing. There are several laws that regulate the creation of these funds, among which:
- the Collective Investment Schemes Act (CISA);
- the Collective Investment Schemes Ordinance (CISO);
- the Collective Investment Schemes Ordinance of the Financial Market Supervisory Authority (FINMA) in Switzerland;
- the Ordinance of FINMA on Bankruptcy of Collective Investment Scheme.
Apart from these, the Financial Market Supervisory Authority has also implemented various ordinances with respect to the operation of such funds. Among these, we remind of the Ordinance on the Distribution of Collective Investment Schemes, the Circular on Market Conduct Rules, and the Circular on the Guidelines on Asset Management.
|Legislation applicable|| |
Collective Investment Scheme (CIS) legislation, Financial Services Act
|CIS, open-ended funds, closed-ended funds|
Legal forms of the investment vehicle
|Contractual investment funds (FCP), companies with variable capital (SICAV)|
|FINMA authorization required (YES/NO)|| |
|Types of participants accepted||Qualified investors (financial institutions, banks, financial intermediaries, independent asset managers)|
|Local license/authorization required (YES/NO)|| |
YES, authorization from FINMA
|Local manager required (YES/NO)|| |
NO, FINMA authorization is required for foreign managers
|Custodian required (YES/NO)||YES|
|Audited financial statements required (YES/NO)||YES|
|Hedge fund startup use (YES/NO)||YES|
|Taxation particularities||Withholding taxes apply to FCP and SICAV companies, the income tax levied at cantonal and municipal level applies to individual investors.|
Starting with 2020, the Financial Services Act and the Financial Institutions Act were also enabled as laws that need to be respected when establishing hedge funds in Switzerland.
If you are interested in creating a Swiss hedge fund, our local partners are at your disposal with complete information on the laws you need to abide by.
The main regulations applicable when creating a hedge fund in Switzerland
The creation of a hedge fund in Switzerland must respect the international standards of good practice that apply to funds registered under the local or foreign laws and base on the category of investors they address. Hedge funds can be marketed to both qualified and non-qualified investors.
As mentioned above, Swiss hedge funds can be organized as collective investment schemes provided that they meet the following requisites:
- the assets are gathered from the investors and administered on their behalf by a fund manager;
- all investors must equally participate in the funds.
The opening of a hedge fund in Switzerland can take the form of an open-ended structure set up as a contractual fund or an investment company with variable capital (SICAV), or of a closed-ended structure when set up as a limited partnership for collective investment schemes or an investment company with fixed capital (SICAF).
When it comes to the investors who can participate in the fund, the term qualified investors can refer to:
- banks, fund management companies, asset managers, securities dealers, insurance companies, and any other financial intermediaries regulated by FINMA;
- independent asset managers;
- high net worth individuals;
- other types of investors.
Non-qualified investors are those who do not enter the categories mentioned above.
When it comes to high net worth individuals these must meet a few conditions, among which:
- they professional experience or education in the financial industry;
- they have a net wealth of at least 500,000 CHF;
- they have a net wealth of at least 5 million CHF;
- they own immovable assets of up to 2 million CHF.
They must also submit a written declaration that they want to be considered qualified investors and that they understand the risks associated with the investments.
An important advantage of a Swiss hedge fund is that it has no restrictions when it comes to who wants to invest in them.
If you are interested in a hedge fund startup, our affiliates in Switzerland can offer more information on how to create one.
What are the main types of hedge funds in Switzerland?
The Swiss legislation prescribes several types of hedge funds that can be registered here. The taxation of the hedge funds incorporated in Switzerland is performed following the regulations of the Federal Act on Collective Investment Schemes. Businessmen interested in starting a hedge fund in Switzerland may set up one of the following legal entities:
- • investment companies with variable capital (SICAV) - a type of investment company which has its capital divided into shares;
- • investment companies with fixed capital (SICAF) - it is set up as a company limited by shares and it is registered following the Swiss Code of Obligations;
- • Swiss contractual funds - they are registered under a collective investment agreement signed by the investors, the custodian bank, and the fund management company;
- • limited partnership for collective investment (LP) - under this structure, it is necessary to obtain approval for starting the operations on the local market from the Swiss Financial Market Supervisory Authority (FINMA).
Businessmen should know that most of the hedge funds registered in this jurisdiction are set up as contractual funds. In this particular situation, it is necessary to register the fund under a Swiss corporation, which should be managed by a management company.
Swiss authorities supervising hedge funds
Hedge funds must comply with specific regulations which is why they fall under strict supervisory rules. In Switzerland, these are regulated by the same agencies as retail funds, namely the Financial Market Supervisory Authority and the Funds and Asset Management Association (SFAMA).
FINMA is in charge of the authorization and supervision of the fund management companies, asset managers and foreign collective investment funds, as well as their retailers and administrators. It will also approve their products (FINMA will verify if the respective assets can be distributed in or outside Switzerland).
SFAMA, on the other hand, is the association representing the collective investment funds and managers in Switzerland. It regulates the standards these operate. The most important thing about SFAMA, however, is that it was recognized by FINMA.
The hedge fund market in Switzerland is a highly regulated one which is why the creation of such a fund in this country is very attractive for foreign professional investors, especially since its products can also be marketed outside Switzerland.
Regulatory requirements for Swiss hedge funds
Those who are interested in how to start a hedge fund in Switzerland must know that these are regulated based on:
- their country of origin (they can be regulated under the Swiss legislation or foreign laws);
- the types of investors they address (qualified or non-qualified investors).
Then, they can be categorized as collective investment schemes, open-ended or closed-ended funds, depending on the investment vehicle used to create them.
Those who apply for authorization with FINMA must also adhere to various regulations and must meet certain requirements. These usually cover individuals who seek to obtain authorization. They must:
- be of good character and have a good reputation;
- ensure the correct management of the fund;
- be specialists in fund management.
If you want to know more about how to create a Swiss hedge fund, our affiliates in this country can provide all the necessary details.
Who can distribute assets under a hedge fund in Switzerland?
Any person or company can use a hedge fund to distribute various assets in Switzerland, as long as they obtain authorization from FINMA. There are also exceptions to this rule, among which banks, securities dealers, insurance companies, management companies, and asset managers need the authorization to market such funds in Switzerland. Representatives of foreign investment schemes are also exempt from obtaining a license in Switzerland.
Hedge funds can offer their products to both qualified and non-qualified investors, with the mention that in the case of the latter, especially when foreign funds make the offerings.
As a general rule, foreign funds registered outside Switzerland and outside European Union states are destined to qualified investors.
The creation of a hedge fund in Switzerland is not difficult as long as all the legal requirements are respected.
Custodians for hedge funds in Switzerland
Just like other types of Swiss funds, hedge funds must appoint custodians to hold their assets. The custodian must be a Swiss bank authorized by FINMA. This requirement applies to domestic funds only, as foreign funds must ensure the protection of their assets in accordance with the laws of their country of origin.
Disclosure requirements for Swiss hedge funds
Swiss hedge funds must publish various information with appropriate media outlets. Among the information they need to disclose are:
- the annual report which must be published within 4 months from the end of the financial year;
- the semi-annual report which must be published within 2 months from the end of the year;
- the issue and redemption price every time shares or units are issued or redeemed;
- prices for securities funds must also be published at least 2 times a month.
The media outlets where such information can be made available are printed newspapers and electronic platforms accepted by FINMA.
Apart from this information, investors also have the right of requesting other details.
If you need more information on how to create a hedge fund startup in Switzerland, our partners can guide you.
What are the most common legal vehicles used for Swiss hedge funds?
In most cases, hedge funds are created as open-ended funds created as FCPs or SICAVs. The benefit from more flexible regulations and can also invest in various assets, among which real estate, precious metals, securities, derivatives, and units in other collective investment funds are permitted. Short-selling is also allowed under FINMA’s regulations.
You can read about how to create a hedge fund in Switzerland in the infographic below:
Hedge fund managers in Switzerland
Fund managers administering the assets of any type of Swiss investment fund are required to obtain authorization from the Financial Market Supervisory Authority. The fund management company must also meet other requirements, among which it must be created as a limited liability company and have the legal address and administrative office in Switzerland.
Fund management companies can offer various types of services, apart from the administration of the fund’s assets. Among these, investment advisory services given that Switzerland has many qualified professionals in the financial field. This is also one of the main reasons to create a hedge fund in this country.
Our local affiliates can guide foreign investors on how to start a fund in Switzerland and other European jurisdictions.
Why open a Swiss hedge fund
Switzerland is a preferred destination for investing in the financial industry and the creation of a hedge fund will bring various tax benefits to local and foreign investors. Also, the categories of qualified investors that can participate in such funds are quite permissive which enables both specialized institutions and high net individuals to enjoy the profits such structures can deliver.
Taxation of hedge funds in Switzerland
Depending on the vehicle chosen for incorporation, the taxation of hedge funds can vary. For example, in the case of a hedge fund startup set up as SICAV, LP, or as a contractual fund, the income tax or the capital taxes are not imposed under the applicable legislation. Investors interested in how to start a hedge fund under one of the above-mentioned vehicles should know that the taxation will be applied to the fund’s founders.
In a SICAF, the taxation is performed following the corporate tax regulations, which means that the fund will be taxed according to the provisions applicable to commercial companies. In this case, the fund will be liable to pay the corporate tax rate as well as capital taxes.
We invite you to watch our video below:
What are the main taxes applicable to Swiss hedge funds?
Investors who are interested in how to start an investment fund operating as a hedge fund must know that the local legislation prescribes the same tax regulations that are available in the case of open-ended and closed-ended retail funds. It is important to know that the corporate income tax will apply as long as the fund is established as a SICAF, in which case, the fund will be taxed at the standard corporate tax rate.
In the case of hedge funds that are set up as FCPs, SICAVs, or LPs, the corporate tax is not applied. These types of funds are also liable for the payment of the capital tax, but only as long as the fund owns real estate. In the case of a SICAV, the capital tax is available at communal and cantonal levels, with the mention that the tax rate can vary depending on the canton in which the fund operates.
Hedge funds are also liable to the withholding tax which, regardless of the type of legal entity chosen for registration, is applied at the standard rate of 35%. Still, differences are available (based on the type of vehicle selected for the hedge fund) in terms of the type of income tax that will be taxed with the withholding tax.
For example, FCPs, SICAVs, and LPs are subjected to the withholding tax for the fund’s profit distributions and accumulated profits, while in the case of a SICAF, the tax is imposed only for the fund’s distributions. Investors should know that the distributions will be exempted from the withholding tax for FCPs, SICAVs, and LPs as long as the income is obtained from real estate.
Another available tax is the issuance stamp tax, which is imposed only on funds registered as SICAFs; the standard rate is 1%, but the fund can be exempted from the payment of the tax for the first issuance of shares with a value of CHF 1 million.
In special conditions, hedge funds set up in Switzerland can benefit from the provisions of the double taxation treaties signed here, but this is applicable for specific jurisdictions, such as Japan, Australia, Canada, Germany or France. Businessmen interested in more details on the registration of a hedge fund in this jurisdiction are invited to contact our affiliates in Switzerland for assistance.