Fund Management: The Fund Entity – Uses, Types and Set Up

Fund Management Companies are regulated under the purview of the MAS, and normally obtain their licensing because they have a product or strategy that they believe would be a unique offering to the market. Most Fund Management Companies (“FMC”)s would choose to manage their clients’ assets via 2 common methods, either the managed account (similar to the External Asset Manager model) setup, and/or the fund vehicle setup.

A Managed Account requires the Fund Manager to have a Limited Power of Attorney (“LPOA”) on an investor’s bank account, where the investor’s assets are custodised. This LPOA is usually subject to the bank’s terms and conditions. The Managed Account method of fund management is normally preferred by Fund Management Companies who have numerous clients that have differing strategies, risk appetites, product preferences, and so on. This allows the FMC to have discretion over these separate accounts, enabling them to execute said strategies in the appropriate manner, and of course, subject to the fair and equitable allocation rule. We have written quite extensively on the EAM setup. Aside from what we have written earlier on, where most Managed Accounts now sit with Private Banks, some Managed Accounts may also sit with a Prime Broker (“PB”), where the Prime Broker helps with both the custody of the investor’s assets, as well as execution of the Fund Manager’s trades. These are normally functions carried out by large institutions who are therefore able to carry out both the custodian and execution aspect of the business for the Fund Managers.

In a situation where a Fund Management Company may have numerous investors with similar investment strategies and risk appetites, the Managed Account mechanism becomes expensive as each trade is made on each account and this would incurs transaction costs. As an alternative, a FMC may set up a pooling vehicle to collate all these investors. This pooling vehicle is known as a fund vehicle, and effectively allows the Fund Manager to trade on behalf of all its underlying investors with similar interests as one large consolidated account, reducing the number of transactions and being able to risk manage across its investor base.

What is a “Fund”?

A fund is a pool of money set aside for a specific purpose.

These pools of money are often invested and professionally managed.

Some common types of funds investment types include, hedge funds, private equity, debt funds, venture capital funds amongst host of other.

Fund Structures & The Global Scenario

The Fund Manager needs determine the best legal entity form/structure to use for the investment strategy of the Fund. This is dependent on a few factors, some of which are as follows:

  • Fund strategy
  • Where investors of the fund are from
  • Type of investments of the fund
  • Where these investments are located[1]
  • Open or Close ended-type fund
  • Tax implications
  • Legal Implications

There are numerous types of fund structures available, dependent on location of where these fund structures may be domiciled. For instance, investors based out of the US generally prefer offshore tax structures such as the Cayman Islands and British Virgin Islands (Important: do take note of international sanctions when deciding where your fund structure should be domiciled), mainly because these are tax havens located close to the US. Because of these offshore jurisdictions gaining so much popularity in the previous years, the local governments came up with more creative structures for Managers to benefit from. The Cayman Segregated Portfolio Company (“SPC”) became quite a commonly used structure for FMCs to be able to ring fence out their offerings within a single legal entity, in a way where the underlying investments and investors in the underlying portfolios may be kept separate from each other.

European investors generally take a liking to Undertakings for Collective Investment in Transferable Securities (“UCITs”) -type fund structures that are based out of Luxembourg as these are perceived to be safe and well-regulated investment vehicles. These were originally put together as a standardisation across the European territories with the retail investor in mind. UCITs structures are normally open ended and liquid in nature. The flexibility of the UCITs structure allows for both Umbrella and single funds, where the umbrella fund can be comprised of several sub-funds and management of each sub-fund can be performed by a different investment manager. Exchange Traded Funds and Money Market Funds are quite commonly established as UCITs funds.

Another option for a European-domiciled fund structure would be the Irish Collective Asset-management Vehicle (ICAV). This too can be open or close ended, and can be established as a standalone or umbrella vehicle. Umbrella ICAVs benefit from segregated liability, similar to the Cayman SPC, and can also be used to both UCITs and Alternative Investment Funds (AIF)-type funds. Additionally, ICAV managers upon set up have the ability to dispense with the need for an AGM, and to produce audited accounts at sub-fund level. One interesting point to here is that there is flexibility in relation to changes to the constitutional documents of the ICAV, which will not require prior approval of members where the depositary certifies in writing that the relevant changes do not prejudice the interests of the members and the Central Bank of Ireland has not otherwise mandated that the change is of a type which must be approved by the members.

In Singapore, the Variable Capital Company (“VCC”) that has recently been established under the guidance of the Monetary Authority of Singapore (“MAS”), Accounting and Corporate Regulatory Authority (“ACRA”), and Inland Revenue Authority of Singapore (“IRAS”), who have collectively taken a page out of the book of all the structure-types abovementioned. The VCC provides an alternative to the Limited Partnership and Private Limited structures available in Singapore for FMCs to use as a fund vehicle based out of Asia. Argus is able to help you identify the right partners and work closely with them to manage the whole set up for you, in a way that is efficient and streamlined in order to simplify the process.

How Argus Helps You Set Up a Fund Structure

The Fund structure picked out is normally in conjunction with input from legal & tax advisors. Some FMCs may argue that these advisors are expensive and cumbersome and could be done without, but it is wise to note that the more complexities involved (e.g. cross border transactions, very liquid/illiquid assets, multiple jurisdiction management, use of Special Purpose Vehicles (SPVs) etc.), the more complex the terms of the offering document will get. Without a clear idea of these implications on the fund structure (and effectively the Fund Manager), inefficiencies could easily eat away at the carry and outperformance fees earned by the FMC. In this regard, our network of experienced partner firms would band together to help put together an appropriate structure specific to your business needs. This would comprise of the following:

  • Tax Advisor: The Tax advisor here would normally identify and put together the appropriate Fund structure in accordance to the FMCs intended business model. Additionally, this may include input on the relevant tax incentive schemes available in accordance to prescribed conditions required to be met by the Fund structure; local tax implications for income paid out to investors, substance requirements, review of Fund documentation as well preparation of tax disclosures to be included in the Fund documents, amongst others. It is appropriate to pick a tax advisor familiar with the taxation requirements of the different jurisdictions that the Fund will be involved in, both from an investor and investee perspective. 
  • Legal Counsel: Once the structure is decided upon, Legal Counsel would normally draft the documents required to formalise the arrangement, starting from the constitution of the legal entity, to the Shareholders Agreement, Investment Management Agreement and Subscription Agreement as well as Private Placement/Offering Memorandums (collectively known as “the Fund Documents”). These documents would spell out the duties and powers of the investment manager as well as the other counterparties involved, the Fund investment limits, as well as any other additional terms and conditions surrounding the offer. Based on where the investors are provided the offer documents, adequate disclosures that are jurisdiction-specific would need to be included as well. These disclosures are usually standard, but require local counsel’s sign off to ensure that the specifics are covered. In most arrangements, legal counsel would be responsible for the documentary mark ups, taking into accord all input from the other advisors in order to ensure that the final document covers all bases.

  • Fund Administrator: The Fund Administrator is an outsourced service provider that protects the interests of the underlying investors of the Fund by independently verifying the assets and valuation of the Fund. These comprise of Fund Accounting and Registrar/Transfer Agency services. It is therefore required that the Fund Administrator provides its input in the initial fund documentation, along with Legal Counsel and the Tax Advisor on record  in order to ensure that the process of accurate reporting of figures reflecting the underlying investments held by the Fund to its investors is in place. However, the Fund Administrator will be an important counterparty for the FMC to rely on an ongoing basis.  Some of the ongoing matters handled by the Fund Administrator may include input on frequency of Net Asset Value (NAV) calculations of the Fund and preparation of Financial Reports and Financial Statements of the Fund. The Fund Administrator also helps with the calculation of the Fund’s accruals, pricing of assets at current market value, assist with the opening and control of the Fund’s bank account, reconciliation of brokers and custodians (where relevant) and FMC statements, maintenance and filing of the Fund’s financial books and records, settlement of daily purchases and sales of assets that goes hand in hand with ensuring collection of dividends and interests, pricing the portfolio of the Fund, calculation of the Fund’s total returns and other performance measures of the Fund, AML/CFT screening, and so on. Similar to the other providers abovementioned, it is appropriate to identify and work with a Fund Administrator that the FMC is comfortable with. The Fund Administrator needs to be familiar with the strategy of the fund, and to be able to accurately provide support and information to the Fund’s investors when required.

As earlier mentioned, Argus is well-versed in the regulatory compliance space and will be able to not only assist you with your Fund set up in Singapore, but also provide you with input and advise on the regulatory requirements surrounding the specific type of entity that you should ideally be setting up. This is executed bespoke to your Fund and Fund Management Company’s business strategy and mandate. We have a team of highly skilled individuals helmed by experienced partners who can help you with every facet of your set up, as a one stop shop managing all your requirements and streamlining an otherwise arduous process. If you intend to know more, have any queries or need further information on any matters relating to the above mentioned, feel free to reach out to us at info@argusglobal.co

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