European Union: Umbrella Fund Structuring In The EU Through Cyprus

Last Updated: 4 June 2019
Article by Antoniou McCollum & Co. LLC

The Cypriot registered alternative investment fund (RAIF), enables a fast and cost-efficient fund launch in the European Union. RAIFs, which can be set up as standalone or umbrella funds, can be managed by a fund manager located anywhere in the EU and do not require individual licensing.

RAIFs do not require licensing by Cyprus Securities and Exchange Commission (CySEC). They are rather supervised by a licensed Alternative Investment Fund Manager (AIFM). As a result, setting up a RAIF involves a minimal timeframe and substantially reduced cost compared to a licensed AIF, while achieving the same legal structure.

Umbrella funds with ring-fenced compartments

A RAIF can be set up as an umbrella fund with more than one investment compartments. Compartments allow the management of separate asset pools with different investment policies and investors. A compartment may invest in another compartment of the same umbrella fund subject to certain restrictions.

Umbrella funds afford investors a level of flexibility to switch investment strategies. Depending on the legal form of the fund, a RAIF must specify in its fund rules or instruments of incorporation that it operates with more than one investment compartments. Although each compartment is treated as a separate investment fund in law, all compartments constitute a single legal entity and therefore no separate fund rules or instruments of incorporation are drawn up.

Rights of unit holders in a compartment (sub-fund) only arise from the assets of that compartment and each compartment is severally liable for the obligations arising from its constitution, operation or dissolution. Assets of an investment compartment are exclusively available to satisfy the rights of unitholders.

RAIF characteristics

Open-ended or closed-ended

Cyprus law affords structuring flexibility, as RAIFs can be established as either a common fund, an investment company or a limited partnership. RAIFs can be open or closed-ended, but cannot be established as money market funds, loan origination funds or funds of funds.

Investors

RAIFs may comprise of an unlimited number of investors. A RAIF can only be available to professional and well-informed investors. RAIF (or compartment) units can be listed on a recognised stock exchange.

No minimum capital requirements

Unlike the AIF, the RAIF has no minimum share capital requirement. It is however subject to minimum investment limits: a RAIF must invest a minimum of EUR 500,000 within the first year of its registration, subject to a 12-month extension set by CySEC.

Management

The AIFM that will manage a RAIF can be licensed anywhere in the EU, enabling EU-wide distribution under the EU passporting framework. By relying on cross-border passporting arrangements to access all EEA jurisdictions, RAIF shares / units can be distributed to professional investors across the EEA.

Third country managers may also be appointed managers of RAIFs subject to having acquired passporting rights in accordance with applicable EU rules. AIFMs must also appoint a custodian for RAIFs, which can be an EU-based credit institution or an appropriate investment firm.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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