Investment Funds

UCITS (Undertakings for Collective Investment in Transferable Securities)originate from European Directive 2009/65/EC dated 13 July 2009. This provides a single regulatory regime across the European Union for open-ended funds investing in transferable securities such as shares and bonds, with a view to defining high levels of investor protection. The Directive regulates the organisation, management and oversight of such funds, and imposes rules concerning diversification, liquidity and use of leverage. It was implemented into national law by Part 1 of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment.

A UCITS fund will be allowed to market its units in a target host Member State as soon as its home regulator confirms that it has submitted a complete notification file (standardised in form and content) to the host regulator within a maximum of 10 working days. However, this simplified notification procedure will not be applicable outside Europe.

Luxembourg, as the first country to implement the UCITS Directive, and to offer a European passport, attracted a large number of promoters of Swiss and American origin who continue to use Luxembourg as a gateway to the European market.

The strong regulation of UCITS and the resulting high level of investor protection have made these open-ended funds popular with supervisory authorities and retail investors all over the world. The UCITS brand and, particularly, Luxembourg UCITS have a large market share in a number of Asian and Latin American countries. For this reason, an increasing number of fund managers create UCITS for global distribution. Luxembourg, as a financial centre of excellence, is the uncontested leader in this field.

Luxembourg offers a range of structures to enable undertakings for collective investment (UCI), which are subject to different levels of regulation. The choice of structure is generally driven by the investment policy and the distribution strategy of the fund.

There are two main categories of UCI:

• undertakings for collective investment in transferable securities (UCITS), which comply with the European Directive on that subject;

• alternative investment funds, which cover all other types of fund including hedge funds, real estate investment funds, and venture capital and private equity funds.

Three legal structures are available:

• the common investment fund (Fonds commun de placement - FCP), which has no legal personality and which must be managed by a fund management company;

• the investment company with variable capital (Société d’Investissement à Capital variable - SICAV), where the capital varies in response to subscriptions and redemptions made by investors;

• the investment company with fixed capital (Société d’investissement à capital fixe - SICAF).

The SICAV and the SICAF may be self-managed or a fund management company may be appointed.

All these structures can be set up as stand alone funds, with single investment portfolios, or they can be structured as multiple compartment funds (also known as "umbrella funds") which create separate sub-funds (compartments) under the roof of a single legal entity. These sub-funds function as independent entities, each with its own investment policy, target distribution market and investor profile.

Each fund or sub-fund can, in turn, issue different classes of shares which vary, for instance, in the type and level of commissions. Thus enabling particular shares or units to be tailored to the needs of a specific market or clientele (institutional or private).

UCITS funds must be set up in accordance with the rules prescribed by the European Union and may only invest in certain investment classes. UCITS funds can be purchased by investors in any European country where they are authorised for sale, and in a number of countries in other regions or on other continents where they are permitted, such as certain Asian countries.