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The Best Domicile for Licenced Investment Fund

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The person has investment performance to show, recently left a very top level management position, have raised nearly $20 mio seed capital, has team,  wants to launch his own fund …

What domicile to choose? What fund structure? I´ll recount the process we just went through.

Funds are easy to incorporate and relatively easy to licence in the Carribean (BVI, Cayman, Bahamas etc.). Cost is reasonable, but marketing of such fund in EU is difficult and the domiciles in Carribean generally are not well perceived by our potential investor base.  The investors are mainly from EU, Eastern Europe and Far East. Some investors clearly prefer to have the money onshore rather than offshore. Basically, their key source of discomfort is that ¨it is difficult to bring money back from offshore¨ and they would rather accept 15% corporate tax and keep it onshore.

U.S. as a fund domicile is no-go area for the managers and potential investors alike. The key reason is managers´ and investors´ perception of U.S. as a country which has went a way too far with their version of policing financial transactions in post-9/11 period. Even small transfer amounts may be blocked with no apparrent reason and unblocked only upon presentation of additional documention justifying the transaction. Based on experience, the controls and regulation may be brute, probably effective, but definately not efficient, and overdone to the point of not being acceptable. So U.S. didn´t make it to the short-list as a fund domicile.

Selected EU countries or Switzerland were perceived as the best domicile due to marketing considerations and favourable perception by potential investors. UK, Ireland, Luxembourg, Switzerland are obvious choices, but the only setback with those seem to be high setup cost and even higher maintenance cost. Setup budget of €100k and annual maintenance cost of €200-300k was something to be expected. This is way too much for a small hedge fund startup with $20 mio seed capital.

We didn´t research in detail Dubai, Singapore and Hongkong options as we decided to focus on EU as the preferred area due to marketing implications. However, quick and dirty analysis showed substantial capitalization requirements as well as high setup and maintenance costs in the aforementioned domiciles.

Our final choice was Malta. It is in EU, Malta law is pretty much as copy of UK law (I hope I don´t hurt anybody´s sentiments here), English is official language in Malta. The fund industry in Malta seems to be properly regulated, while not overregulated. Reportedly, Malta Financial Services Authority (MFSA) is efficient and easy to deal with, if the fund directors meet the ¨fit and proper¨ criteria. At least, it is what we have learned from someone who has just launched a startup fund of similar size in Malta.

We´re planning a visit to Malta in mid-September to meet potential services providers. With telephone calls to Middle East and Switzerland for recommendations and with more telephone calls to Bermuda, UK and Malta we hope we have identified domicile and service providers who are a good fit for us. We expect setup costs to be in €20k area and annual maintenance cost in €30k area – this is a small fraction of what it would cost in UK, Ireland or Luxembourg, yet offers basically the same functionality in terms of structure quality in general and for marketing purposes in particular.

There are several fund setup structure options. In one of the subsequent blog posts I´ll recount our reasoning about which fund structure is the most appropriate for a startup hedge fund.

 

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Written by A.S.

August 9, 2011 at 9:41 am

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