Introduction

Ireland is one of the leading international domiciles for regulated hedge funds and fund of hedge funds (FoHFs), offering a variety of fund structures with differing levels of investment and borrowing restrictions, investment mechanics, minimum subscription requirements, service provider requirements and authorisation timeframes depending on the proposed portfolio composition and targeted investor profile for a particular project.

There are no restrictions imposed in terms of strategy with Irish hedge funds being suitable for directional equity / long short equity products, equity arbitrage, equity statistical arbitrage, event driven, fixed income and fixed income arbitrage, global macro, managed futures, distressed securities and convertible arbitrage strategies, amongst others. In addition, investment in underlying hedge funds may be made in both regulated and unregulated funds, leveraged or unleveraged funds, open ended / limited liquidity / closed-ended funds, underlying funds subject to "lock-up" periods as well as in master feeder structures.

In addition to being a leading international domicile for hedge funds, Ireland is also one of the main service locations (fund administration, audit, legal and consulting services) for hedge funds domiciled outside of Ireland with a significant proportion of the approximately 5,000 non-Irish domiciled funds (including sub-funds) administered from Ireland being in the hedge fund space.

Regulatory Regime

The Irish Financial Services Regulatory Authority (the "Financial Regulator") is the competent authority responsible for the authorisation and ongoing supervision of all regulated Irish fund structures, including hedge funds and FoHFs as well as UCITS.

The legislative basis for Non-UCITS funds in Ireland is found in Part XIII of the Companies Act, 1990, in the Units Trusts Act, 1990, in the Investment Limited Partnership Act, 1994 and in the Investment Funds, Companies and Miscellaneous Provisions Act, 2005, expanded upon by a series of Non-UCITS related notices issued by the Irish Financial Regulator (the "NU Notices") and with further clarification provided for in a series of Financial Regulator guidance notes ("Guidance Notes"), each of which – the legislation, the NU Notices and the Guidance Notes – have evolved and been amended over time.

Hedge Funds and FOHFs

Due to the types of exposures taken, leverage requirements and investment techniques, hedge funds are most frequently established as non-UCITS schemes which do not benefit from the principle of mutual recognition within the European Economic Area and cannot be publicly marketed in many EEA Member States. They are normally private placement vehicles, offered in accordance with the relevant target jurisdictions' local private placement rules.

The investment and borrowing limits for non-UCITS products set down by the Financial Regulator are based on the targeted investor profile - retail investors, professional investors and qualifying investors – with few investment and no borrowing limits, but high minimum subscription requirements and investor net worth criteria, imposed on the most flexible qualifying investor fund structure.

Qualifying investor funds are subject to a minimum subscription requirement of Euro 250,000 per investor. Natural person investors in qualifying investor funds must meet a minimum net worth test of at least Euro 1.25 million (excluding principal private residence/contents), with all other investors being required to own or invest on a discretionary basis at least Euro 25 million or be owned by individuals who themselves are qualifying investors.

For professional investor funds, a minimum subscription requirement of Euro 125,000 per investor applies, with no investor net worth criteria.

Fast Track Authorisation for QIFs

The most used Irish fund structure for hedge funds and FoHFs is the qualifying investor fund or QIF. QIFs benefit from a fast track authorisation procedure – a self certification regime which allows for a 1 day authorisation process.

UCITS Alternative Funds

Following the recent financial crisis and the ongoing deliberations around the draft Alternative Investment Fund Managers Directive, UCITS funds are now receiving significant interest from the alternative investment community and investors.

UCITS is a pan-European fund product which can be established in Ireland (and other EU jurisdictions) under a harmonized EU legislative framework. UCITS is recognised worldwide as a robust, well-regulated investment product attracting investment from both inside and outside the EU – for example from Asia, South America and non-EU European jurisdictions such as Switzerland.

While there are continuing developments on asset eligibility, UCITS are capable of facilitating many alternative investment strategies since the UCITS III Directive was implemented. Both the increased level of understanding of the parameters of UCITS III as well as market factors have driven the recent uplift in the number of these type of funds being established.

Once authorised, a UCITS can be publicly offered cross-border within the EU under a passport and without additional authorisation. In addition, the level of recognition of UCITS globally means that the public registration process in non-EU jurisdictions is now well established and has been greatly simplified.

In Hong Kong for example, the vast majority of international funds registered for public offering are UCITS.

Our "Guide to UCITS in Ireland" considers UCITS structures in more detail. We have concentrated in this publication on Non-UCITS products as they still account for the vast majority of all Irish hedge funds and FoHFs.

Principal Legal Structures

The legal structures within which regulated hedge funds can be housed are variable capital investment companies, unit trusts, investment limited partnerships (rarely used) and common contractual funds. The investment company and unit trust structure are those most frequently used (natural persons cannot invest in common contractual funds).

Umbrella type investment companies can be established with statutory based segregated liability between sub-funds within the umbrella. Segregated liability between funds within umbrella unit trusts is based on the concept of each fund being a separate trust.

Liquidity Options

As noted above, hedge funds and FoHFs can be structured as open-ended, open-ended with limited liquidity, limited liquidity or closed-ended schemes. Gates, deferred redemptions, holdbacks, in-kind redemptions and side pockets can all be facilitated within these types of funds.

Prime Brokers

The use of prime brokers to Irish hedge funds is well established with most of the leading international prime brokers having been approved to act for Irish funds. The applicable rules dealing with the use of prime brokers focus on the rating/financial resources of the prime broker, the extent to which assets of a fund can be rehypothecated by the prime broker, the nature of the relationship between the fund's Irish custodian and the prime broker as well as requirements as to enforceablility of set-off /netting provisions.

Stock Exchange Listing

Irish domiciled hedge funds authorised by the Financial Regulator automatically meet the majority of the Irish Stock Exchange's ("ISE") listing criteria. As a result, their shares or units can easily be listed within the same timeframe as the fund's authorisation, if a listing is required or considered beneficial.

A listing on the ISE meets the "exchange listed" criteria of many European counterparts/investors.

Regulatory Categorisations

As explained in the introduction, the Financial Regulator sets the investment and borrowing limits for hedge funds and FoHFs products based on the targeted investor profile - retail investors, professional investors and qualifying investors – with few investment and no borrowing limits, but high minimum subscription requirements and investor net worth criteria, imposed on the most flexible qualifying investor structure.

Qualifying Investor Funds

The qualifying investor fund or QIF is the most frequently used vehicle for hedge funds and FoHFs due to its greater flexibility in terms of investment limits and no borrowing or leverage limits. A minimum initial subscription requirement of Euro 250,000 per investor applies and investors must meet certain net worth tests.

A natural person investing into a QIF must have a minimum net worth of at least Euro 1.25 million (excluding principal private residence/contents) and all other investors must own or invest on a discretionary basis at least Euro 25 million or be owned by individuals who themselves qualify as qualifying investors. Qualifying investors must self certify that they meet these minimum criteria, that they are aware of the risks involved in the proposed investment and of the fact that, inherent in such investments, is the potential to lose the entire sum invested.

Where the fund is an umbrella scheme, the investor's aggregate subscriptions across the entire umbrella are taken into account. Unless otherwise provided in the relevant prospectus, the amounts of subsequent subscriptions are unrestricted.

Although institutions may not group amounts of less than Euro 250,000 for individual investors, institutions which are themselves Qualifying Investors and which are investing monies pursuant to fully discretionary mandates may group amounts of less than Euro 250,000 being managed for individual investors.

Professional Investor Funds

A minimum subscription requirement of Euro 125,000 per investor is imposed for professional investor funds or PIFs, but no net worth criteria.

PIFs may provide a derogation from the minimum subscription requirement to investors who are trustees of pension plans, provided that the investors commit to invest the minimum subscription amount within a period of 12 months.

Where the fund is an umbrella scheme, the investor's aggregate subscriptions across the entire umbrella are taken into account. Unless otherwise provided in the relevant prospectus, the amounts of subsequent subscriptions are unrestricted.

Although institutions may not group amounts of less than Euro 125,000 for individual investors, institutions which are themselves professional investors and which are investing monies pursuant to fully discretionary mandates may group amounts of less than Euro 125,000 being managed for individual investors.

Retail Investor Funds

A fund which has no minimum subscription requirement or has a minimum subscription which is less than Euro 125,000 per investor will be considered to be a retail investor fund.

Knowledgeable Employee Exemption

An exemption from the minimum subscription requirement for both QIFs and PIFs and an exemption from the QIF qualifying investor criteria is available to the fund's managers and a limited number of other persons and entities that are closely connected with the management of the fund (the "knowledgeable employee" exemption).

Investment and Leverage Restrictions: Direct Investments

The investment restrictions for direct investing hedge funds (i.e. not FoHFs or feeders which are dealt with in the following sections) are outlined below.

Qualifying Investor Funds

QIFs are subject to the following investment restrictions in respect of direct investments:

  • QIFs are not permitted to acquire shares carrying voting rights which would enable them to exercise significant influence over the management of issuing bodies (this restriction does not apply to holdings in underlying funds);
  • QIFs structured as investment companies must comply with the principle of "spreading investment risk" as required under section 253(2)(a) of the Companies Act, 1990 Part XIII. It is left to the discretion of the Board of Directors to determine actual diversification with reference to particular strategies;
  • QIFs may invest up to 100% of assets in underlying regulated or unregulated funds but no more than 50% of net assets in a single underlying regulated or unregulated fund;
  • investment in an underlying fund in excess of 50% of net assets will be treated as a feeder type investment. The general rule is that QIFs may only invest on a feeder basis into "regulated" masters where, in this context, "regulated" means a fund which provides an equivalent level of investor protection to that provided under Irish laws, regulations and conditions governing Irish QIFs. However, for large, long established asset managers a derogation may be available for QIFs feeding into unregulated masters where the underlying unregulated master fund is managed within the same group (see Investment Restrictions: Feeder Funds below); and
  • when transacting over-the-counter in circumstances where collateral is being passed by the QIF outside the Irish trustee / custodian's custodial network, QIFs are generally required to deal with counterparties with a minimum credit rating of A2/P2 (or A1/P1 where the QIF's exposure to such a counterparty may exceed 40% of its net asset value). Currently, a QIF in the form of an investment company (as opposed to a unit trust, common contractual fund or limited partnership) is limited to this 40% figure because of the statutory obligation to spread its investment risk to which it is subject.

For QIFs, borrowing and leverage are not subject to regulatory limit. It is a matter of prospectus disclosure only.

Professional Investor Funds

PIFs are subject to the following investment restrictions in respect of direct investments:

  • PIFs are not permitted to acquire shares carrying voting rights which would enable them to exercise significant influence over the management of issuing bodies (this restriction does not apply to holdings in underlying funds);
  • PIFs structured as investment companies must comply with the principle of "spreading investment risk" as required under section 253(2)(a) of the Companies Act, 1990 Part XIII. It is left to the discretion of the Board of Directors to determine actual diversification with reference to particular strategies;
  • PIFs may invest up to 100% of assets in underlying regulated or unregulated funds but no more than 20% of net assets in a single underlying unregulated fund and no more than 40% of net assets in a single regulated fund where, in this context, "regulated" means a fund which provides an equivalent level of investor protection to that provided under Irish laws, regulations and conditions governing Irish PIFs;
  • Investment in an underlying fund in excess of 40% of net assets will be treated as a feeder type investment. PIFs may only invest on a feeder basis into "regulated" masters; and
  • when transacting over-the-counter in circumstances where collateral is being passed by the PIF outside the Irish trustee / custodian's custodial network, PIFs are generally required to deal with counterparties with a minimum credit rating of A2/P2 (or A1/P1 where the PIF's exposure to such a counterparty may exceed 40% of its net asset value). Currently a PIF in the form of an investment company (as opposed to a unit trust, common contractual fund or limited partnership) is limited to this 40% figure because of the statutory obligation to spread its investment risk to which it is subject.

For PIFs, borrowing and leverage are generally restricted to 50% of net asset value but limits in excess of this level are permitted on a case-by-case basis.

Retail Investor Funds

While most hedge fund managers do not target retail investors, it is possible to establish several categories of fund in Ireland which offer hedge fund or alternative investment exposure to retail investors in a well regulated form.

The main fund categories for such offerings are via UCITS products and Retail FoHFs, although ETFs, Multi-Manager Funds, Property Funds, Currency Funds, Capital Guaranteed and Protected Funds, Leveraged Funds and Derivative Funds are also available.

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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.