unit funds for Luxembourg and common contractual funds for Ireland) and, in Ireland, unit trusts. Both jurisdictions also offer master- feeder structures and umbrella/segregated sub- fund/compartment options. Funds domiciled in EEA countries such as Ireland and Luxembourg are required to use local depositary service providers. Ireland also requires a local administrator and that
at least two of the fund’s directors be Irish residents. While Luxembourg does not have a strict legal requirement as such, the fact that the central administration is required to be in Luxembourg for corporate and tax purposes makes it a practical requirement to use a local administrator and structure the board with a majority of directors resident in the greater Luxembourg region.
Fund Directors and Service Providers Fund Directors Companies (including general partners of
Prime brokers, depositary and trading counterparties. The fund’s prime brokers will custody, clear and settle trades entered into by the fund as well as providing access to financing and securities lending. Hedge funds will often appoint more than one prime broker as well as a number of other trading counterparties, allowing them to access liquidity more effectively and also trade in a wide range of securities and through a wide range of derivative instruments. Prime brokers extend capital so as to enable funds to acquire securities on a leveraged basis. Assets of the fund are used as collateral against the loan, and the prime broker will have the right to rehypothecate the assets, usually up to a certain percentage of the amount borrowed. Prime brokers can extend the capital in a number of ways. This may include the simple extension of credit to allow a fund to acquire an asset as well as the provision of credit through the leverage inherent in derivative instruments. Prime brokers may also undertake the role of clearing, settling and safe-keeping of the fund’s assets. The ability for a prime broker to custody a fund’s assets will depend on the country-specific rules and regulations for the holding of assets, and the scope of a prime broker’s market coverage, including from a geographical perspective. Prime brokers may operate a sub-custodial network to provide coverage in the jurisdictions in which it does not have custody capabilities. One of the most important factors to consider is the manner in which assets are held in custody, in particular as to whether assets are segregated from those of other clients.
partnerships) are required to appoint directors (or in the case of a limited liability company, managers). Such directors will be subject to a number of statutory and fiduciary duties and be required to approve certain corporate and other actions taken by the company (or the company on behalf of the partnership to which it acts as general partner), including the appointment of service providers to the fund. Fund directors do not typically make investment decisions, responsibility for which is usually delegated to an investment manager. Likewise, day-to-day administration of the fund is delegated to the fund’s administrator, and custody is delegated to an appointed prime broker or custodian. The directors are required to maintain oversight of delegated activities. While it is common for a representative of the investment manager to sit on the board of directors, a company should look to appoint a majority of independent and non-UK-based directors. This is usually fundamental to the tax structuring of a UK-managed hedge fund in the context of a UK investment management business and is also important for a range of other reasons. Certain Key Service Providers A hedge fund’s key service providers are broadly as follows: Investment manager. An investment management agreement will be entered into between the fund and the manager pursuant to which the manager is appointed on arm’s length terms to provide portfolio management, risk management and marketing services.
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