Alternative Investment – Advantages of Maltese Hedge Funds – Fund Management/ REITs

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Key facts about Malta

  • Malta became an EU member state in May 2004 and joined the Eurozone in 2008.

  • English is widely spoken and written in Malta and is the primary business language.

Factors Contributing to Malta’s Competitive Advantage

  • Strong legal and regulatory environment with a legislative framework in line with EU directives. Malta integrates the two jurisdictional systems: civil law and common law, because commercial legislation is based on the principles of English law.

  • Malta enjoys a high standard of education with graduates representing a cross section of the various disciplines related to financial services. Specific training in financial services is offered at various levels of post-secondary and higher education. The accounting profession is well established on the island. Accountants are either university graduates or certified public accountants (ACA/ACCA).

  • A proactive regulator who is very approachable and business-savvy.

  • An ever-increasing supply of quality office space for rent at cheaper prices than in Western Europe.

  • Malta’s development as an international financial center is reflected in the range of financial services available. In addition to traditional retail functions, banks are increasingly offering; private and investment banking, project finance, syndicated loans, treasury, custody and custodial services. Malta also hosts several institutions specializing in trade-related products, such as structured trade finance and factoring.

  • Malta Standard Time is one hour ahead of Greenwich Mean Time (GMT) and six hours ahead of US Eastern Standard Time (EST). International business can therefore be handled smoothly.

  • International Financial Reporting Standards, as adopted by the EU, are anchored in company law and applicable since 1997, so there are no local GAAP requirements to follow.

  • A very competitive tax regime, also for expatriates, and an extensive and growing network of double taxation agreements.

  • No restrictions on the granting of work permits for third-country nationals.

Malta Hedge Funds: Professional Investor Funds (PIF)

Maltese legislation does not directly refer to hedge funds. However, Maltese hedge funds are licensed as Professional Investor Funds (PIF), a collective investment scheme. Hedge funds in Malta are generally incorporated as public or private investment companies (SICAVs or INVCOs).

The Maltese Professional Investor Fund (PIF) regime consists of three categories: (a) those who are promoted to Qualified Investors, (b) those who are promoted to Extraordinary Investors and (c) those who are promoted to the rank of experienced investors.

Certain conditions must be met to fall into one of these three categories and therefore be able to invest in an FIP. PIFs are UCITS intended for professional and wealthy investors with a certain degree of expertise and knowledge in their respective functions.

Definition of an Accredited Investor

A “qualified investor” is an investor who meets the following criteria:

  1. Invests a minimum of EUR 100,000 or its currency equivalent in the PIF. This investment may not at any time be reduced below this minimum amount by way of partial reimbursement; and

  2. Declares in writing to the fund manager and the PIF that said investor is aware of and accepts the risks associated with the proposed investment; and

  3. Meets at least one of the following criteria:
  • A legal person whose net assets exceed EUR 750,000 or part of a group whose net assets exceed EUR 750,000 or, in each case, the currency equivalent thereof; Where

  • A group of persons or unincorporated associations whose net assets exceed EUR 750,000 or the equivalent in currency; Where

  • A trust whose net value of the assets of the trust exceeds EUR 750,000 or the equivalent in currency; Where

  • A person whose net worth or joint net worth combined with their spouse exceeds EUR 750,000 or currency equivalent; Where

  • A senior manager or director of a service provider at the BIP.

What are Malta BIPs used for and what are their benefits?

PIFs are often used for hedge fund structures with underlying assets ranging from securities, private equity, real estate and infrastructure. They are also commonly used by funds engaged in cryptocurrency trading.

FIPs offer many benefits, including:

  • PIFs are intended for professional or high net worth investors and are therefore not subject to the restrictions usually imposed on retail funds.

  • There are no investment or leverage restrictions and PIFs can be configured to hold only one asset.

  • It is not necessary to appoint a custodian.

  • An accelerated licensing option available, with approval within 2-3 months.

  • Can be self-managed.

  • May appoint administrators, managers or service providers in all recognized jurisdictions, members of the EU, EEA and OECD.

  • Can be used to set up virtual currency funds.

It is also possible to domicile existing hedge funds from other jurisdictions in Malta. In this way, the continuity of the fund, the investments and the contractual arrangements are continued.

Malta Alternative Investment Funds (AIF)

AIFs are mutual funds that raise capital from investors and have a defined investment strategy. They are not subject to approval under the scheme for Undertakings for Collective Investment in Transferable Securities (UCITS).

The recent transposition of the Alternative Investment Funds Directive (AIFMD), through amendments to the Investment Services Act and Investment Services Rules and the introduction of subsidiary legislation created a framework for the management and marketing of non-UCITS funds in Malta.

The scope of the AIFMD is broad and covers the management, administration and marketing of AIFs. However, it mainly covers the authorisation, operating conditions and transparency obligations of AIF managers as well as the management and marketing of AIFs to professional investors across the EU on a cross-border basis. These types of funds include hedge funds, private equity funds, real estate funds, and venture capital funds.

The AIFMD framework provides for a lighter or de minimis regime for small AIFMs. De minimis AIFMs are managers who, directly or indirectly, manage portfolios of AIFs whose assets under management collectively do not exceed the following amounts:

1) €100 million; Where

2) €500 million for AIFMs managing only non-leveraged AIFs, without redemption rights exercisable within five years of the initial investment in each AIF.

A de minimis AIFM cannot use EU passport rights arising from the AIFMD scheme.

However, any AIFM whose assets under management are below the above thresholds can still opt for the AIFMD framework. This would subject it to all the obligations applicable to fully-fledged managers and allow it to use the European passport rights arising from the AIFMD.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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