Tuesday, 10 January 2012

Some less well known facts about Malta hedge funds

Much has been said in the specialist press about the Malta Hedge Fund product - the Professional Investor Fund, and I assume many readers will be familiar with the basic characteristics of the product. Today I want to highlight some features that, it seems to me, are somewhat less well known but are nevertheless important and noteworthy.

Service provider flexibility: one of Malta's key distinguishing features is the freedom that is afforded with respect to choice of service providers. The authorities understand that managers have strong relationships with their service providers which they may want to preserve when changing domicile. Malta hedge funds are therefore generally allowed to appoint whichever reputable service providers they choose, whatever the domicile of the service provider may be (a list of recognized jurisdictions is kept by the regulator for this purpose, covering the majority of the likely jurisdictions.

Choice of legal structure: most Malta hedge funds are formed as investment companies with variable share capital. Although this is a proven model with an excellent track record, its universality may have more to do with habit than necessity. A number of other vehicle options exist and these may be better suited to different circumstances. Tax transparent unit trusts, for example, may be useful in situations where an underlying asset attracts a high tax at source.

Freedom to pursue unorthodox investment strategies: the Malta hedge fund product, the PIF, allows fund managers to pursue their investment strategy of choice, with no investment restrictions being imposed on Malta hedge funds which have a minimum investment threshold of EUR 75,000 and market to suitably professional investors. The jurisdictions thus plays host to a variety of investment strategies, from traditional equity long/short to funds that invest in antique watches, life settlements, and similarly unusual asset classes.

A quasi-retail option: PIFs are sophisticated products that are intended for investors having a high degree of financial strength and expertise. Having said that, Malta permits the creation of 'quasi-retail' professional investor funds that can be marketed to 'experienced investors'. Investors in these funds are only required to invest a relatively modest EUR 10,000 as a minimum. The trade-off is that these funds are required to adhere to certain minimum diversification and investor protection requirements, designed to ensure that the rights of investors are protected.

Dr Charles Cassar
Financial Services Lawyer
Chetcuti Cauchi Advocates

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