1.1 General Overview of Jurisdiction
Switzerland is an attractive jurisdiction thanks to the stability of its economy and legal framework, as well as its extensive and reliable infrastructure and developed financial sector. Thanks to a strong education system and attractive living conditions, it is also able to train, retain and attract a talent pool.
Switzerland is primarily an important hub for the distribution of alternative investment funds. It is home to a number of sophisticated investors interested in alternative investments: pension funds, large insurers and re-insurance companies, global wealth managers and large institutional investors, as well as a significant number of high net worth individuals and family offices. According to a report prepared by Swiss Banking and Boston Consulting Group, a high proportion of Swiss investment managers invest in alternative asset classes (about 18% of assets managed in Switzerland in 2017; see Swiss Banking and Boston Consulting Group: Switzerland – A strong hub for investment management, 2018). Allocations tend to focus on real estate and, to a lesser extent, hedge funds. By contrast, private equity, commodities, infrastructure and other asset classes are less common, although there is increasing attention for infrastructure and private debt investments.
Furthermore, a number of alternative investment fund managers are based in Switzerland. These actors are focused on hedge funds and private equity. Based on the annual report of the Swiss Financial Market Supervisory Authority (FINMA) for 2018, there are 212 licensed managers of collective investment schemes. This figure arguably understates the number of alternative investment fund managers, since financial institutions that are licensed as a fund management company, a bank or a securities dealer can also manage alternative investment schemes without requiring this licence. Furthermore, asset managers can also operate with a business model that does not necessarily require a licence (eg, if they only intervene in an advisory role).
By contrast, Switzerland is less attractive than some jurisdictions for setting up an alternative investment fund, eg, the Cayman Islands, Ireland or Luxembourg. As per year-end 2018, there were 50 real estate funds and 66 so-called other funds for alternative investments.
2.1 Types of Alternative Funds
As mentioned above, the number of alternative investment funds domiciled in Switzerland is relatively low. Due to tax constraints, Swiss law collective investment schemes are typically established to cater to a domestic investor base, eg, Swiss pension funds, Swiss insurance companies, and Swiss high net worth individuals.
The bulk of alternative investments tend to focus on real estate, which are treated as a regulatory category of their own. Other alternative funds tend to be funds of funds or multi-manager funds in various alternative investment strategies, although several funds are single-manager funds invested in hedge funds, commodities or private equity
2.2 Fund Structures
Alternative funds can be set up in Switzerland as open-end funds, such as contractual funds managed by a fund management company or an investment company with variable capital (Société d'investissement à capital variable or SICAV), or as closed-end funds, such as an investment company with fixed capital (Société d'investissement à capital fixe or SICAF) or as a limited partnership for collective investments (LPCI).
Alternative funds can also be organised as a company limited by shares. If they are listed on a Swiss stock exchange or restricted to qualified investors, within the meaning of the Federal Act on Collective Investment Schemes of 23 June 2006 (CISA, SR 951.31), they do not fall within the scope of the CISA. Instead, Swiss corporate law and, in the case of a listed company, the listing rules and any additional regulations of the stock exchange, apply to the establishment and operation of such investment companies.
Contractual funds and SICAVs are subject to the same investment rules. Open-end alternative funds usually fall within the category of "other funds for alternative investments", which provides the broadest flexibility in terms of permitted investments. However, depending on the strategy, an investment fund or SICAV could be set up as an "other fund for traditional investments" or even, if it can meet the exacting investment restrictions applicable to Undertakings for Collective Investment in Transferable Securities (UCITS), a securities fund.
By contrast, the LPCI is conceived primarily as a vehicle for investments in venture capital, private equity and construction, real estate and infrastructure, as well as alternative investments by qualified investors, and is not subject to stringent requirements on permissible investments. In practice, LPCIs have been mainly used for private equity investments or investments in real estate projects. There are currently 19 licensed LPCI in Switzerland.
There are also currently 12 investment companies listed on SIX Swiss Exchange, which mainly invest directly or indirectly in private equity and venture capital as well as hedge funds, and a further 17 real estate companies. BX Swiss also listed shares of 16 investment companies which are invested in real estate as well as, to a lesser extent, venture capital and private equity.
2.3 Regulatory Regime
The regulatory framework for establishing and operating alternative funds and for their managers is governed by the CISA and its implementing ordinances:
- the Ordinance on Collective Investment Schemes of 22 November 2006 (CISO, SR 951.311);
- the Ordinance of the Swiss Financial Market Supervisory Authority on Collective Investment Schemes of 27 August 2014 (CISO-FINMA, SR 951.312); and
- the Ordinance of the Swiss Financial Market Supervisory Authority on Collective Investment Schemes of 6 December 2012 (CISIO-FINMA, SR 951.315.2).
FINMA is responsible for the supervision of fund management companies, asset managers of collective investment and distributors. In this capacity, it is also responsible for authorising or approving Swiss collective investment schemes as well as the distribution of foreign collective investment schemes. In this capacity, FINMA has published several circulars which address specific issues of collective investment schemes law (such as the distribution of collective investment schemes). Furthermore, it has also recognised a number of guidelines of the Swiss Funds/Asset Management Association (SFAMA) as expressing a minimum prudential standard, which means that all institutions are required to comply with these guidelines as a matter of law, regardless of SFAMA membership.
The CISA provides four different investment vehicles for structuring Swiss collective investment schemes, which either fall into the category of open-end or closed-end collective investment schemes. Open-end collective investment schemes give the investors the right to request the fund or a related party to redeem their units at their net asset value at regular intervals. There is no such right for closed-end investment schemes. The CISA allows for two types of openend collective investment schemes: the contractual investment fund and the SICAV. Closed-end investment schemes can be established as LPCIs or SICAFs.
The contractual investment fund and the SICAV are fairly interchangeable vehicles. By contrast, the SICAF and the LPCI do not share many commonalities other than being closed-end structures: the SICAF is an investment company organised as a company limited by shares which is open to retail investors, whereas the LPCI is a special form of limited partnership reserved for qualified investors.
With the exception of the LPCI, all investment vehicles under the CISA can be used for any investment strategy. As mentioned above, open-end alternative funds will typically be set up as "other funds for alternative investments" which provide the broadest flexibility in terms of permitted investments. If the requirements relating to investment strategy are met, an alternative fund can be set up as an other fund for traditional investments or even, if the demanding restrictions for UCITS can be satisfied, a securities fund. Furthermore, if a fund is offered only to qualified investors, certain requirements can be waived thus offering additional flexibility in this area.
The LPCI is conceived primarily as a vehicle for investments by qualified investors in venture capital, private equity and construction, real estate and infrastructure projects, as well as alternative investments.
In addition, alternative funds may also be structured as an investment company which does not fall within the scope of the CISA, provided that it is either listed on a Swiss stock exchange or restricted to qualified investors (within the meaning of the CISA). Instead of the rules of the CISA, Swiss corporate law and, in the case of a listed company, the listing rules and any additional regulations of the stock exchange apply to the establishment and operation of such investment companies.
As mentioned above, the investment limitations depend on the specific type of collective investment scheme. Among open-end collective investment schemes, open-end collective investment schemes for alternative investments offer the broadest range of possible investments and strategies. In particular, they may invest in investments that:
- have only limited marketability;
- are subject to high price fluctuations;
- exhibit limited risk diversification; or
- are difficult to value
Open-end collective investment schemes for alternative investments can also leverage their investments. In particular, they may:
- raise loans for an amount of up to 50% of the fund's assets;
- pledge or cede as collateral no more than 100% of the fund's net assets;
- commit to an overall exposure of up to 600% of the fund's net assets; and
- engage in short selling in accordance with the fund regulation and enter into securities lending and repo transactions.
The fund's regulations must explicitly set out these investment restrictions. FINMA may, however, allow for exemptions from these principles on a case-by-case basis, in particular when the alternative fund is reserved for qualified investors.
LPCIs are not subject to particular restrictions on their investments. An LPCI can, for example, invest in risk capital, including private equity, debt and hybrid forms. They can also invest in construction, real estate and infrastructure projects, as well as alternative investments, generally speaking. To safeguard the interest of limited partners, an LPCI can take control of companies and sit on the board of target companies. Furthermore, no particular restriction applies to borrowing.
To view the full article, please click here.
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.