The reasons for creating a foreign investment fund
A foreign investment fund is an instrument created to manage pooled assets, create new projects and generate income. When creating a foreign investment fund, it is necessary to take into account some factors that affect the choice of jurisdiction for registration and corporate structure.
According to the regulations, the requirements that must be taken into account may vary depending on the type of fund, asset class, strategies, markets, tax regime, etc. The activities of institutions such as foundations are usually carefully regulated.
The concept of open and closed foreign funds
Based on your investment strategy, you may choose whether to create an open or closed fund. For example, if a foreign fund starts investing in illiquid assets, the most frequently chosen type of structure is a closed one. Investors usually cannot withdraw their investment in this case.
In some cases, private closed-end funds may not be registered with the regulatory authorities, but there is a risk that they will be subject to anti-money laundering laws. Peculiarities of registration and legal conditions may vary depending on the country where the fund is located.
Funds that are invested in liquid assets are most often structured as open-end funds. Usually, investors can make additional contributions and withdraw investments according to current rules. Open-end funds must meet certain requirements and conduct the reporting of collective investments.
PROS of creation
Investment funds have some advantages for an investor. These include economies of scale. Thus, by performing operations with large amounts, you can reduce the amount of transaction costs. In addition, it is possible to reinvest dividends. This means that most often an investor can choose whether to receive dividends by transferring them to a bank account or reinvest them automatically.
Some funds have other advantages as well. For example, funds that cooperate with small companies increase the liquidity of the invested money. There are funds that allow you to invest in the stock exchanges of different countries.
When investing, it is important to consider some negative aspects as well. For example, if a fund is large (over 2 billion), it is to some extent more difficult to manage it. There is also a law according to which a fund may not buy more than 10% of the shares of any company. Such funds are more difficult to reconstruct when conditions on the securities market change. In addition, an investor may not know at what price he will be able to buy or sell assets in investment funds beforehand.
Types of foreign funds
It is possible to create an investment fund through various legal structures and mechanisms. Usually their availability is dependent on the country. These include investment firms, mobile companies, portfolio companies, LLCs, limited liability partnerships, mutual funds and contractual arrangements.
Restricted liability companies are more frequently used for open-end funds in those countries where laws allow the distribution of profits and capital. The main advantage of using such a structure is that the liability of shareholders is limited to debts and provides liquidity.
LP partnerships are most often used for closed funds, which have long-term investments. An LP is not considered a separate legal entity and is formed by an SOE, which manages and draws up contracts on its behalf and has unlimited liability for debts. If an LP loses its solvency, the SOE is liable for debts.
In contrast to this form, LLPs have a separate legal personality. A unit trust is most commonly used for open funds. It is a legal instrument, but it is not considered a legal entity and has no legal personality of its own. Please contact our experts at IT-OFFSHORE for more details on fund formation.
