Understanding funds - hedging your bets

Since the establishment of the IFSC in Dublin in 1987, Ireland has grown into a globally-renowned funds centre, says Sonia Howard, tax director, BDO. The Central Bank of Ireland (CBI) is the regulatory authority responsible for the authorisation and supervision of Irish fund vehicles, she says, and it has worked closely with the Irish funds industry to accommodate a range of tax-exempt investment products using a variety of structures.

Ireland has total assets under administration of about €4 trillion, with Irish-domiciled funds amounting to more than €2.2 trillion with over eight thousand funds, says Howard. Ireland is the domicile for 5.9 per cent of worldwide investment funds assets, making it the third largest global centre and the second largest in Europe.

“Funds, though they come in a lot of shapes and sizes, are generally speaking an investment vehicle for a large number of investors to pool together their investments and invest those on a collective basis,” says James McKnight, partner, Simmons & Simmons.

“The benefit of doing so is to spread the fixed costs associated with investing across a larger number of investors. If you were to make these investments by yourself it would be more expensive to do so. The idea with a collective investment scheme like a fund is that it benefits the economies of scale that comes with a large number of investors clubbing together to make investments.”

Within that, from a regulatory perspective, there are essentially two main designations: Undertakings for the Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs). UCITS are primarily for non-professional or “retail” investors and AIFs are any fund other than a UCIT. “Usually AIFs are limited to what we call professional investors,” says McKnight.

UCITS vs AIFs

Conor MacGuinness, global head of onboarding and relationship management at Waystone, explains that UCITS are tightly regulated investment funds that can be marketed to all investor types, both retail and institutional in Ireland, across the EU and globally. “They have strict rules and a high level of investor protection in terms of what asset types can be included and on portfolio composition and diversification. They typically allow investors to buy and sell on a daily basis and hold liquid assets such as equities, money market instruments or fixed income.”

“Because UCITS allow retail investors – people who either don’t have the experience or the time to learn about investments and what they need to do make active decisions about the type of investments they want to invest into – there are strict rules around risk spreading, the type of investments that UCITS can invest into, and liquidity,” says McKnight.

“In order to be authorised as a UCITS you need to offer the opportunity to investors to get all of their money back twice per month.” As a result, UCITS can only invest in very liquid instruments such as listed shares, stocks and bonds.

Alternative Investment Funds

AIFs refer to all investment funds that are not covered by the EU Directive on UCITS and instead fall under the Alternative Investment Fund Manager Directive (AIFMD), says Howard. "This includes hedge funds, funds of hedge funds, venture capital, private equity funds and real estate funds."

The main category for AIFs in Ireland under the Central Bank of Ireland rules are Qualifying AIFs (QIAIFs),” says MacGuinness. “They are for qualifying investors such as institutional investors. Retail Investor AIFs (RIAIFs) are a hybrid between QIAIFs and UCITS. There are relatively few in the market.”

QIAIFs offer the broadest flexibility in terms of liquidity options as they may be structured as open-ended, open-ended with limited liquidity, or closed-ended, says Howard. “The RIAIF is a retail fund product with no minimum investment requirement. A RIAIF cannot avail of the automatic right to market across Europe under the AIFMD marketing passport but access to individual markets may, however, be granted on a case-by-case basis.”