In our previous article titled “Cyprus: The Financial Services Sector and Investment Funds” we talked about the benefits for the Financial Services Sector in Cyprus as well as for the exponential growth in Investment Funds. In this article, we are giving you some information regarding what are funds, the difference between UCITs and AIFs, AIFs in Cyprus but also about RAIFs and Umbrella Funds.
What is a Fund?
A Fund is a collective investment undertaking, meaning the raising of capital by a number of investors for the purpose of investing into various assets in order to generate revenue for the investor. A typical fund structure will have a Fund Manager assigned for the purposes of enforcing the fund’s investment strategy and managing the distribution of funds capital between the invested assets of the Fund. There are 2 broad categories of funds, Undertakings for Collective Investment in Transferable Securities (UCITs) and Alternative Investment Funds (AIFs).
What is the difference between UCITs and AIFs?
UCITs as the name denotes mostly invest in “safe” liquid assets like bonds, shares, debt etc. making them more suitable for retail investors. On the other hand, AIFs can invest in a variety of assets, limited only by their investment strategy, making them more suitable for professional or well-informed investors, only under certain conditions are allowed to accept retail investors. In general, UCITs invest in low-risk low yield investments whereas AIFs prefer high-risk high yield investments.
What are Cyprus Alternative Investment Funds (AIFs)?
An AIF in a Collective Investment Undertaking:
- Which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors;
- Which does not require authorisation as UCITS.
What are the different types of AIFs?
There are three types of Alternative Investment Funds that can be set up in Cyprus.
- the Alternative Investment Fund of an unlimited number of investors (AIF)
- the Alternative Investment Fund of Limited Number of Investors (AIFLNP), and
- the Registered Alternative Investment Fund (RAIF).
It is important to note for AIFLNP investors may not exceed the total number of 50, whereas for AIFs and RAIFs number of Investors can be unlimited.
What are the characteristics of AIFs/AIFLNPs/RAIFs?
- AIFs or RAIF follow similar legal and regulatory principles whereby they are both considered a Fund with Its shares redeemed or repurchased directly or indirectly by its assets following an application of its shareholders as defined the Fund’s Prospectus.
- Its capital is increased by the issue of new shares, whereas its capital is decreased by the redemption or the repurchase of the old ones. Hence it adopts the Variable Capital Investment Company statutes.
- The value of its shares is reflected by the net asset value (NAV) of its assets.
- AIF’s are marketable to qualified, professional or institutional investors both internationally and within the EU member States (full pass-porting rights within EU).
Alternative Investment Fund with Unlimited Number of Persons (AIF)
- May be marketed to “retail”, or “well-informed” and/or “professional investors”
- Freely transferable investor shares
- Must appoint a global custodian
- Can be listed on a recognised stock exchange, and AIFs marketed to retail investors can be traded
- Subject to minimum capital requirements of €125,000 or €300,000 if a self-managed fund
- May be subject to certain investment restrictions depending on the investor type and the overall investment policy
Alternative Investment Fund with Limited Number of Persons(AIFLNP):
- May be marketed only to “well-informed” and/or “professional investors”
- Cannot exceed the total number of 50 investors/unitholders
- Freely transferable investor shares, with the condition that their transfer does not result in the AIF having more than 50 investors
- In certain cases, it may not be required to appoint a licensed manager or a custodian
- Assets under management do not exceed the AIFMD thresholds of €100 million (including leverage) or €500 million (5-year lock-up period without leverage)
Registered Alternative Investment Funds (RAIFs)
- A RAIF is similar to AIF however; it is registered and regulated under the responsibility of the AIFM hosting it, whereby all operational and marketing efforts are conducted under the liability of the AIFM as a European fully passported Fund Management Structure.
- RAIFs are registered within one month from submission of the relevant notification package to CySEC to confirm the registration of the RAIF and allow the raising of capital.
What are Umbrella Funds?
- Funds that wish to utilize a variety of investment strategies can be set up as Umbrella Funds. An Umbrella Fund can divide its pool of assets into compartments having each compartment implementing a different investment strategy mitigating investment risk between compartments.
- The Umbrella funds, afford investors a level of flexibility to switch investment strategies.
- It is important to highlight that each compartment or subfund is Ring fenced and fully segregated from the Umbrella Fund and the other Sub-Funds.
◦ Each Compartment’s investors’ rights are restricted to the assets of the compartment.
◦ Each Compartment can be dissolved separately.
◦ Each Compartment can have its own investment strategy.
◦ Also very important the set-up and running costs of each compartment is lower than separate funds
How can CX Financia help you?
At CX Financia, we have helped clients structure and establish their businesses in Cyprus – some of which required support with their AIF.
We will be happy to discuss your enquiries with you and assist you. You can have a look at our Investment Firms or Investment Funds Services for more information. If you have any additional questions, you can send us an email at email@example.com.