Before answering that question, let us first recall the definition of an investment fund. They are baskets of securities selected because of their growth potential by management companies with expertise in financial markets. They break down into two broad categories. First, there are undertakings for collective investment in transferable securities (UCITSs). They fall under the EU’s UCITS Directive, are subject to investment rules coordinated at European level and are aimed at all types of savings. 

A wider choice of assets

Second, we have what are known as alternative funds. They come under another European directive: the AIFMD (Alternative Investment Fund Manager Directive). Unlike the UCITS Directive, the AIFMD Directive allows fund managers a wider choice of assets in which they can invest and permits the use of more responsive management methods, such as withdrawing from a market very quickly. However, their investment policies have to be approved by the market regulator. In Luxembourg, the country’s Financial Sector Supervisory Commission (CSSF) performs that role.

Alternative funds can adopt the same legal forms as UCITSs, specifically: the mutual fund (FCP), which does not have legal personality and must appoint an asset-management company to look after it; the open-ended investment company (SICAV), whose equity continually varies on the basis of its investors’ subscriptions and withdrawals; and the closed-ended investment company (SICAF).  On top of those, there are the special purpose vehicle (FIS) and the venture capital investment company (SICAR). 

The special purpose vehicle (FIS)

Created by the law of 13 February 2007, the special purpose vehicle (FIS) can invest in all sorts of asset: from securities funds to real-property funds, taking in traditional monetary funds, hedge funds and venture-capital funds along the way. Unlike the funds available to the public, FISs benefit from more flexible regulation and therefore offer investors less protection. That is why they are only offered to institutional, professional or qualified investors.

The venture capital investment company (SICAR)

Created by the law of 15 June 2004, as amended, the venture capital investment company (SICAR) directly or indirectly contributes financing to companies, with a view to their launch, growth or stock-market flotation. Unlike other funds, SICARs are not obliged to respect the risk-spreading principle when selecting their investments. They could very well be limited to investments in a single company with a particularly small niche, e.g. biotechnology. In view of the risk they represent, SICARs are only available to sophisticated investors.

The reserved alternative investment fund (FIAR)

To add to this array of high-end investments, a new vehicle was approved on 14 July 2016, named the reserved alternative investment fund (FIAR). FIARs have similar features to FISs, but FIARs are different in that they are not subject to the approval and oversight of the Luxembourg Financial Sector Supervisory Commission (CSSF). There is therefore far less time between the launch and marketing of such funds. Where, previously, a certain amount of time was required to obtain approval, it now just takes a few days from when the fund is legally constituted. Another consequence is that it now costs far less to create a fund, not least in legal fees. Lastly, needless to say, FIARs are only available to certain investor classes.

Clearly, the trend is for fund industry to become increasingly complex in Luxembourg, but that is the price that must be paid for the country to remain competitive as a financial centre against its major international rivals


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