Zurich—June 15, 2011

Staying Cool
Last Wednesday’s seminar at Zurich’s Hotel Baur au Lac was a straightforward promotional event for Luxembourg. Not Luxembourg as in the land of moules et frites. But Luxembourg the country. Luxembourg the jurisdiction. Luxembourg the place for setting up funds.

So, given its promotional nature, there ought to have been no surprise when the seminar was overheard to be “part of a road show.”

Road show? It sounded so commercial, so hard-sell, while yesterday’s experience was anything but. As the summer heat outside the hotel conference room climbed to 29 degrees, the microclimate indoors stabilised at wall-to-wall cool. Luxembourg was looking mighty comfortable as the world’s premier centre for cross-border funds.

Why is staying cool in today’s alternative-fund landscape such a triumph?

Because there’s so much change to deal with. And whether you attribute that massive change to the hedge-fund implosion or to the vicissitudes of the economy at large, there’s a great deal going on with alternative-investments. To wit: post-crisis, investors are in the driver’s seat, and they’re aiming for safety and security. Transparency is also valued. Risk is out. Regulation—led by the Alternative Investment Fund Managers Directive—is in. Increasingly, offshore structures are seen as dodgy, onshore structures as legitimate. And in this shift to onshore, fund services are being scrutinised more closely than ever.

At this seminar, five experts from Luxembourg’s fund sector charted the alternative-fund industry’s new directions. Loyens & Loeff lawyer Manfred Dietrich discussed the post-financial-crisis regulatory environment. Referring to increased scrutiny, he said, “It is not only the fund structures that are being looked at; it is, in particular, the persons who are dealing with the fund management.” It was a rational and plainly stated pitch for choosing experienced, even cautious, fund professionals.

Anja Grenner of Ernst & Young shed more light on the uses of two popular Luxembourgish fund structures: the SICAR and the SIF. The SICAR, she explained, was created for investments that particularly engender risk. She cited real estate, where the classical investment model is to buy property in order to generate rental income. This does not engender high enough risk to meet the SICAR’s requirements—even if the investment takes place in a country that’s considered risky. So this classical property investment would suit a SIF, and not a SICAR. On the other hand, the opportunistic real estate model of “Buy-Develop-Sell” is literally built around the notion of risk capital—it’s implicitly risky!—and, as such, it qualifies for the SICAR structure.

Koen de Witte of Ernst & Young talked with admirable clarity—and great humour—about Luxembourg taxes. He added to his colleagues’ distinctions between the SICAR and the SIF, encouraging the audience to remember, if nothing else, that the SICAR is taxable on anything but income derived from securities. The SIF, in contrast, is tax-exempt except for .01 per cent.

When the conversation came around to administering funds, Sinan Sar of United Trust emphasized “substance—the big topic!” Substance requirements, he said, compel investors to show that the company’s “mind and management” are indeed in Luxembourg, where the fund is domiciled. Mr. Sar gave plenty of specific examples, advising at one point, “If you want to make a new investment, make sure that your fund managers come to Luxembourg physically.” He made it clear that the CSSF, Luxembourg’s regulatory body, takes a hands-on role in monitoring funds. So, when establishing substance, he said, “the more [requirements you meet] the merrier.” That can mean renting office space; owning relevant Internet domains; trademarking logos—all this and more contributes to creating safe structures, he explained.

Regarding the custodian’s role in fund management, Banque de Luxembourg’s Corinne Feypel-Molitor had this to say: “Luxembourg has big experience in this area—with or without the AIFMD [Alternative Investment Fund Managers Directive]…I think that we are quite well-prepared for the next years.” Ms. Feypel-Molitor also broached the question of how investors perceive custodians. “We talked about this at the coffee break,” she said, “and some investors want the added comfort to know that there is a custodian who really safeguards those investments.”

At the end of the day, one had the feeling that these Luxembourg practitioners were cool (though not smug) because they could be: They work hard. They have the law on their side. They have industry trends on their side. And they had the good sense to spend a particularly warm afternoon with like-minded people in an elegant, air-conditioned room, in the heart of Switzerland’s financial community….

For more information and to register, please contact Laura Star